(April 7): Japan’s auction of 30-year notes saw muted demand as investors stayed cautious amid uncertainty about Middle East tensions.
The bid-to-cover ratio at Tuesday’s sale was 3.12 compared with 3.66 at the last auction and a 12-month average of 3.36. It was the weakest figure since June. Bond yields edged lower after the auction, on relief there were no major disruptions.
The sale was “somewhat weak,” but “considering that there was a high level of caution going into the auction, the results were within a reasonably acceptable range,” said Rinto Maruyama, FX and rates strategist at SMBC Nikko Securities Inc. “Due to persistently high crude oil prices, concerns about global inflationary pressures remain. In this environment, investors are unable to step in as buyers.”
Japan is among the major economies most vulnerable to a fallout in Middle East tensions, with more than 90% of oil imports coming from the region. The 30-year yield is hovering around 3.76%, near the record high that it hit in January, underscoring concerns about rising inflation driven by higher oil prices.
US President Donald Trump insisted that freedom of navigation through the Strait of Hormuz be part of any deal and escalated threats to obliterate key Iranian infrastructure if his terms aren’t met before a Tuesday deadline.
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“While the 30-year sale passed smoothly, investors likely won’t take on risk ahead of the US deadline on Iran, so a wait-and-see stance is likely to continue until then,” said Ataru Okumura, senior interest-rate strategist at SMBC Nikko Securities.
Japan’s auction of 10-year notes last week drew the weakest demand since May. In the US, upcoming sales of three-, 10- and 30-year Treasuries will also bring a test of investor appetite after recent lackluster auctions.
What Bloomberg strategists say:
JGB traders won’t be impressed with a wider tail and the bid-to-cover ratio slipping below the one-year average, although it was at least just above 3.0. The timing of the debt sale ahead of President Trump’s deadline on Iran was always going to make this a tricky sale. Relative value investors are likely to wait for Trump and the 30-year Treasury auction on Thursday before jumping in. Meanwhile, the mix of JGB buyers is positive as there is a broad distribution across institutions. — Mark Cranfield, Markets Live Strategist.
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Meanwhile, persistent yen weakness is compounding inflation risks by pushing up import costs. Japan’s top currency official last week delivered his strongest warning yet to speculators that authorities may take bold action in markets if current conditions persist.
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