(Jan 14): Japan’s five-year government bond auction drew the weakest demand since August as expectations that Prime Minister Sanae Takaichi will call a snap election reinforced concerns over increased debt issuance.
Bond futures slid after the sale’s bid-to-cover ratio came in at 3.08, down from 3.17 at the previous offering in December and below the 12-month average of 3.54. Ahead of the results, yields on five-year bonds rose to 1.615%, the highest since the debt’s debut in 2000.
Bond-market sentiment remains fragile amid reports that Takaichi may call a snap election, potentially giving her a mandate to pursue hawkish diplomacy and pro-stimulus policies. The so-called Takaichi trade has also lifted Japan’s stock benchmarks to record highs and pushed the yen to its weakest level against the dollar since July 2024.
“It was a somewhat weak result, likely reflecting expectations that the Liberal Democratic Party will win the election or even secure an outright majority, making it easier for the Takaichi administration to implement a proactive fiscal policy,” said Ken Matsumoto, macro strategist at Credit Agricole Securities Asia BV. The yield curve may steepen more if there is an election, he said.
Takaichi’s government plans to unveil a record initial budget for the fiscal year starting in April. Despite the increase in spending, issuance of super-long government bonds will be reduced from the current fiscal year while sales of two- and five-year debt will rise, the Finance Ministry said earlier.
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That’s set to lift net sovereign debt supply by about 8% to roughly ¥65 trillion in the coming fiscal year, the largest increase in more than a decade, according to Bloomberg analysis. Combined with reduced bond purchases by the Bank of Japan, the shift is expected to add further upward pressure on yields.
Meanwhile, yen weakness could bolster expectations for an earlier Bank of Japan rate hike. The central bank may raise rates as soon as April amid market concerns over Takaichi’s fiscal stance, former board member Makoto Sakurai said in an interview.
Overnight index swaps show the first rate hike this year isn’t fully priced in until July, leaving room for further repricing if yen weakness persists.
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The auction outcome may also reflect waning demand for five-year bonds as banks’ loan-to-deposit ratios improve amid changes to the BOJ’s lending conditions, according to Takashi Fujiwara, chief fund manager at Resona Asset Management.
The tail or gap between average and lowest-accepted prices slightly widened to 0.05 at Wednesday’s (Jan 14) sale, compared with 0.04 last month.
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