Japan's 20-year government bond auction Tuesday saw the strongest demand on record, a signal that elevated yields are starting to lure domestic investors back into the market.
The bid-to-cover ratio was 5.84, compared with 4.01 at the previous sale, and a 12-month average of 3.73. In reaction, the yield for the tenor fell as much as 6 basis points to 3.710% after the results, while the 30-year yield dropped as much as 5 basis points.
Super-long yields for Japanese government bonds have recently approached multi-decade highs, as a global bond selloff driven by escalating tensions in the Middle East and higher oil prices added to inflation and fiscal concerns. Earlier this month, the 20-year JGB yield climbed to levels last seen in the mid-1990s, while the 30-year yield hit a record high.
Also Read | Layoffs Are Rising In Tech, But These Skills Are Helping People Unlock Better Pay
“JGBs are investable again,” said Masahiko Loo, a Tokyo-based senior fixed-income strategist at State Street Investment Management. “The mindset is gradually moving from ‘don't catch a falling knife' to ‘getting paid to wait,' a shift increasingly visible across global bond markets,” he said.
The rise in yields reflects persistent concerns over Japan's fiscal outlook, as investors are focused on how Prime Minister Sanae Takaichi will fund her planned sales-tax cut on food and soft drinks without further straining the nation's finances. Takaichi has sought to ease market concerns, saying her administration aims to build a strong economy and achieve fiscal sustainability, while pledging to appropriately manage JGB issuance in next fiscal year's budget.
Against that backdrop, investors have been watching to see if elevated yields will draw demand from domestic institutional buyers. Fukoku Mutual Life Insurance Co., the first life insurer to outline its plans for the fiscal second half, said it sees scope to move a bit more from foreign bonds into yen bonds as yields have risen more than expected.
“The positive outcome of the 20-year JGB auction is seen as a reflection of recovering demand from domestic investors, driven by high interest-rate levels and easing fiscal concerns,” said Ryutaro Kimura, senior bond strategist at BNP Paribas Asset Management. Life insurers have strengthened their net buying of super-long bonds again since June, underscoring the recovery in demand.
More than 83% of bids were from unidentified buyers. The high proportion suggests demand from large-scale investors including mega-banks and the Government Pension Investment Fund, Kimura added. Rebalancing-driven demand from the GPIF is likely to be limited given the recent decline in stocks, while megabanks may sell their holdings as yields fall if they won a significant amount at the auction, making a sustained decline in yields unlikely, he said.
What Bloomberg Strategists say ...
That's stunning demand for a 20-year JGB auction; indeed, it is the best on record for the duration and sets up a faster pace of yield curve flattening.
It is exceedingly rare to see any JGB auction with a bid-to-cover above 5.0, and it's even more remarkable in 20-year, which has seen a decidedly mixed record over the past two years.
There is a very large unknown component in the buying, which suggests that foreigners have stepped up to participate. Showing confidence that the BOJ will deliver on a steady path of interest rate hikes. Over to you, Mr. Ueda.
— Mark Cranfield, Markets Live Strategist. Read more on MLIV.
A major test for Japanese bonds will come at the Bank of Japan's policy meeting next week. While markets widely expect the central bank to keep rates unchanged, with overnight index swaps pricing in about a 6.2% chance of a hike, traders will look to Governor Kazuo Ueda's post-decision press conference for signals on the pace and scope for further tightening.
ALSO READ: NYSE Becomes Second Major Exchange To Extend Option-Trading Hours For ETFs, Single Stocks
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.
