TOKYO -The markets will be closely watching an auction of Japan’s longest tenor bonds on Wednesday to see if debt investors will continue to put up with the worsening finances of major government issuers.
Bond yields, particularly on the long end, have surged around the world in recent weeks as concerns mount over fiscal deficits.
Heavily indebted Japan’s government bonds are the “canary in the global duration coalmine,” Goldman Sachs analysts wrote last week after poor demand at a sale of 20-year bonds.
JGBs rallied sharply in the afternoon on Tuesday after Reuters reported that the Ministry of Finance may tweak its issuance plan to reduce issuance of super-long bonds.
That would come too late to impact Wednesday’s sale of about 500 billion yen ($3.5 billion) of 40-year bonds, whose yields touched a record high 3.675% last week, along with an all-time high for 30-year paper and a multi-decade peak for 20-year debt.
Long-dated debt has sold off on concerns tax cuts and a chaotic roll-out of sweeping tariffs by U.S. President Donald Trump will stoke inflation and impel governments to spend more. That has driven up the term premium – the extra yield offered to buyers in exchange for locking up their money in longer-dated securities.
Moody’s on May 17 became the last major rating agency to strip the United States of its top grade because of growing debt, which stands at about 124% of GDP.
But the situation is more precarious in Japan, where the debt ratio is double that amount and the central bank has slashed its bond buying to support the economy.
Finance Minister Katsunobu Kato warned that higher rates could further imperil Japan’s finances and pledged “appropriate” management of its debt.
What sets Japan apart from other markets is that its finance chiefs are directly addressing the dramatic runup in longer yields and acting to prop them up, said Shoki Omori, chief desk strategist at Mizuho Securities.
“If you look at other places in the world, say Europe or the U.S., I don’t think any policymakers are saying that they will support the long end,” Omori said. “If you look at the U.S., it’s the opposite.”
A reduction in issuance of 20-, 30- or 40-year JGBs would be counterbalanced by increased sales of shorter-dated debt, sources told Reuters, meaning overall issuance for the fiscal year would remain at 172.3 trillion yen.
The change would be positive for super-long bonds, but now attention turns to how much the MOF will scale things back by, said Shinichiro Kadota, head of Japan FX and rates strategy at Barclays Securities Japan.
“A smaller-than-expected reduction could be a cue for a sell-off,” Kadota said.
The MOF may look to pre-COVID levels of super-long supply, which would be about 3 trillion yen less than current levels, Societe Generale analysts said in a note.
The trigger for last week’s sell-offs in JGBs was an auction of 20-year debt that saw the tail – the difference between the lowest and average accepted prices – reach its widest since 1987, signalling weak demand.
The 40-year sale on Wednesday won’t have a tail due to a difference in auction procedure, but traders may watch the bid-to-cover ratio, with higher numbers indicating healthier demand. The longest tenor bonds have averaged ratios of 3 since they were first sold in 2007.
Mizuho’s Omori said the auction is likely to go well due to speculation over MOF issuance tweaks, but it may be a short-term fix.
“There’s not going to be many other catalysts for long-term yield support,” he said.
($1 = 142.7000 yen)
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