Japanese bonds rally on hopes of less supply

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Japanese longer-dated bonds rallied on Tuesday after the government took the rare step of canvassing primary dealers and other market participants for their views on issuance, raising speculation it may scale back supply.

The move by the Japanese finance ministry appeared designed to restore calm to a bond market that has been racked by volatility in recent weeks, with borrowing costs rising to record highs last week.

The yield on the 30-year Japanese government bond, which hit 3.2 per cent last week, fell 0.19 percentage points to 2.85 per cent on Tuesday. The 10-year yield dropped 0.05 percentage points to 1.46 per cent. Yields move inversely to prices.

The questionnaire was sent to a wide range of primary brokers, according to two people familiar with the situation, and sought comments on the current market situation.

They said it appeared designed to confirm that demand for super long-dated bonds was structurally low, as a precursor to a potential government decision to pull back on issuance.

Japanese yields have risen precipitously in recent months, with the 30-year yield rising above 3 per cent last week. A weak bond auction this month added to fears over low demand for longer-dated sovereign debt.

Although last week’s jump in long-dated bonds came as part of a global sell-off, several factors have added to the selling pressure in Japan. 

The Bank of Japan last year began tapering the massive bond-buying programme it undertook as part of the country’s long battle against deflation. But as the central bank has scaled back purchases, there has not been a strong rise in demand from other traditional buyers, in particular Japanese life insurers.

The “buyers’ strike”, as some traders have described it, became clear last week when an auction of 20-year JGBs was met with the lowest level of demand in a decade. Concerns have also risen about Japan’s gross national debt, which stands at more than 200 per cent of GDP.

Analysts noted, though, that an unusually packed cluster of auctions in long-dated JGBs had also created a short-term supply glut.

MUFG analysts noted that the finance ministry’s decision to send the questionnaire “may well reflect increased concerns over yields following the poor 20-year auction last week and ahead of a 40-year bond auction tomorrow”.

US government bonds also rallied on Tuesday, with the 30-year Treasury yield down 0.07 percentage points to 4.96 per cent.

“The questionnaire looks like it is part of a strategy by the Japanese authorities to prepare the market for a temporary scaling back of super long JGB issuance,” said a person familiar with the questionnaire.

“In other countries you might just get a clear announcement from the government: Japan prefers to generate a consensus, and present itself as acting on the strength of broad-based market opinion,” the person added.

“Markets are taking some relief from the [finance ministry’s] implicit messaging that supply of the super long end could be trimmed,” said Benjamin Shatil, a senior economist at JPMorgan.

“But the sticking point here remains the demand side of the equation. With persistent inflation, tightening domestic liquidity, and a BoJ committed to normalisation, the longer-term outlook remains one of higher Japanese yields.”

The finance ministry did not immediately respond to a request for comment.