(Bloomberg) — Japan’s 20-year government bond auction went off without spectacle, leaving an uneasy calm ahead of elections later this month as investors look for signs of a possible increase in the nation’s debt.
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Demand showed some improvement over recent sales. The bid-to-cover ratio of 3.15 was below the 12-month average but still the highest level since March. The tail, or gap between average and lowest-accepted prices, was 0.18, the narrowest since January.
The Ministry of Finance has adjusted its issuance to reduce the amount of longer-maturity bonds it sells, which has curbed bond-market volatility. Yet investors are concerned about the market impact of rising debt levels, which are in the spotlight as politicians seek to woo voters with more government spending or tax cuts ahead of an election of the Upper House later this month.
“The 20-year bond auction held today produced a neutral outcome, with neither the bid-to-cover ratio nor the tail being particularly weak,” said Miki Den, senior rates strategist at SMBC Nikko Securities. “In addition to the fact that yield levels had become more attractive, the stabilization of super-long-term bonds since the previous day and the halt in the steepening of the yield curve also contributed to making the bonds easier to buy.”
The yield on the 20-year bond was unchanged on the day at 2.51%, after dropping 2.5 basis points ahead of the auction. Bond futures rose 4 ticks to 138.73.
Sovereign bond yields surged globally earlier this week, with the 30-year Treasury yield heading back toward 5% as some of the world’s biggest banks sent fresh warnings over fiscal spending concerns. US Treasuries rallied on Wednesday after an auction of 10-year notes drew strong demand, easing concerns that investors will balk at financing swelling US deficits.
What Bloomberg Strategists say:
“The 20-year JGB auction just went off with solid metrics on the surface. However, with upper house elections to come, bond investors will go on being wary of longer-end debt amid fiscal spending risks.”
— Mark Cranfield, Markets Live Strategist, Singapore.
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In Japan, some major life insurers continue to be skeptical. Meiji Yasuda Life Insurance Co. said it plans to avoid actively investing in Japanese super-long-term government bonds for the next year or two as interest rates may rise and supply pressures build. This is right when the central bank — the dominant holder — is trying to gradually back out of the market.
