(Jan 6): Japan’s long maturity bond yields rose after a relatively smooth 10-year government bond auction failed to dispel ongoing fiscal and inflation concerns.
Bond futures pared gains after the sale and the 10-year government bond yield hit a fresh high since 1999. Japanese government bond yields have recently risen to multi-decade highs as investors brace for the Bank of Japan’s rate hike plans as well as Japan Prime Minister Sanae Takaichi’s higher spending for economic growth.
The 10-year bond auction was “smooth yet marked by lingering caution,” said Shoki Omori, chief desk strategist at Mizuho Securities Co in Tokyo. The market reactions “suggest that the auction did not provide a signal strong enough to mark a turning point and the JGB market remains in a wait-and-see phase”.
The BOJ lifted its policy rate to a three-decade high in December but Governor Kazuo Ueda offered little guidance on the timing of the next move. The yen’s weakness has intensified concerns that the central bank may be falling behind the curve in its efforts to rein in inflation.
Most BOJ watchers expect the next move to come around the middle of the year while some say there’s a risk it could happen sooner due to the weak yen. However, overnight index swaps show the next BOJ rate hike isn’t fully priced in until September.
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The bid-to-cover ratio at Tuesday’s (Jan 6) auction was 3.30, compared with 3.59 at the previous sale and a 12-month average of 3.24.
“The auction had a decent result due to the rise in yields,” said Ataru Okumura, a senior interest-rate strategist at SMBC Nikko Securities. “Still, persistent expectations of higher interest rates in the future, fuelled by uncertainty surrounding the BOJ’s neutral rate, make it difficult for demand to be strong enough to push down yields.”
The 20-year government bond yield hit its highest level since 1999 and the 30-year climbed to a fresh peak since its debut on Tuesday afternoon.
See also: Japan bond futures hold gains after 30-year sale allays concerns
Meanwhile, Takaichi’s government plans to unveil a record initial budget for the fiscal year starting in April. Despite the increase in spending, government bond issuance will be reduced from the current fiscal year as record tax revenues helped limit the need for additional borrowing.
Investors are now paying attention to the 30-year bond auction on Thursday after Japan announced plans to cut sales of super-long government bonds during the fiscal year beginning in April.
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