Japanese bonds yields fall ahead of test at 40-year auction

[TOKYO] Yields on Japanese super-long bonds fell ahead of an auction on Wednesday (May 28) that is expected to test demand following a recent sale that sent jitters through global markets.

Yields on 40-year and 30-year maturities slid 10 basis points in Tokyo on Tuesday, adding to drops in recent days. These moves followed sharp gains in yields to record highs last week.

The Ministry of Finance’s 40-year debt sale on Wednesday is coming at a time when long-term borrowing costs have also surged in other major economies, including the US. Japan’s super-long bonds became increasingly unstable after last week’s 20-year debt auction drew the weakest demand in more than a decade.

Japan’s yields, particularly in the super-long sector, have been on the rise as the Bank of Japan (BOJ) scales back its bond purchases, while life insurers are failing to fill in that gap. Bonds have trimmed their losses this week but there are concerns yields may rise again if the 40-year auction fails to attract buyers.

“The recent rise in yields has reduced investor appetite and there are likely to be few investors willing to bid aggressively,” said Keisuke Tsuruta, a senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities. “If the auction goes poorly, the 10-year yield will likely hit a new high.”

Longer-term yields are surging globally as government spending rises, but the steepening in Japan’s yield curve has been particularly acute. The higher yields point to increased borrowing costs for the government, as Prime Minister Shigeru Ishiba cautions over additional spending and says Japan’s financial conditions are worse than Greece’s.

A finance ministry estimate released in January said the government expects its annual debt-servicing costs to rise to almost US$230 billion over the next four years.

The BOJ surveyed bond market participants last week ahead of the review of its bond-buying plans at a board meeting next month. Major life insurance companies and pension funds expressed concerns over rising super-long bond yields and called for action by the central bank.

Four of Japan’s biggest life insurers reported about US$60 billion of combined unrealised losses on their domestic bond holdings for the latest fiscal year. BOJ governor Kazuo Ueda has refrained from making any indications that he’s prepared to take action in the bond market.

Another Japanese life insurer, Taiyo Life Insurance, plans to increase its holdings of domestic bonds, but says there is a possibility that it may need to postpone some investments.

“Yields have reached levels where we would like to invest, but liquidity is low and price fluctuations are too large, so we have no choice but to consider the timing of investment,” said Yoshitaka Sato, general manager of the investment planning department at Taiyo Life.

Some market participants are hoping that strong results at the 40-year auction may put a halt to the recent rises in yields.

“Given the high yield levels, the reduced issuance amount and the investor-friendly auction method, this might be a pretty good auction,” said Kazuhiko Sano, chief strategist at Tokai Tokyo Securities. “It might serve as a catalyst to stop the excessive increases in yields.” BLOOMBERG