Japan super long government bonds got a boost on Thursday after Reuters dropped a report suggesting the country might actually cut back on issuing these bonds next fiscal year. That’s the kind of news bond traders love to hear.
The 30 year JGB yield dropped from a record high of 3.45% hit just the day before, falling as low as 3.38%. By the end of the session, it was down 3 basis points to 3.395%. Remember, when yields fall, bond prices go up. They move in opposite directions.
The Reuters story from Wednesday basically eased fears that Japan was about to flood the market with too many of these super long bonds. Those worries had been pushing yields to record highs lately, especially with Prime Minister Sanae Takaichi’s debt funded stimulus package making everyone nervous about supply.
The 20 year JGB yield also retreated, dropping as low as 2.94% before settling down 2 basis points at 2.965%.
But not everything moved in the same direction. The two year JGB yield actually flipped course and climbed 1 basis point to 1.11%. That happened after an auction for bonds with the same maturity got a pretty lukewarm response from buyers.
Eiichiro Miura, who’s senior general manager of investments at Nissay Asset Management, explained what was going on: “The weak demand was a reflection of bets for the Bank of Japan’s next interest rate hike.”
BOJ Governor Kazuo Ueda added fuel to the speculation on Thursday when he said the nation’s underlying inflation is gradually and steadily creeping up toward the central bank’s 2% target. That’s the kind of talk that makes people think rate hikes are coming.
Shorter dated bond yields had already jumped sharply after the BOJ raised interest rates last week to 0.75%, the highest in 30 years. Now everyone’s trying to figure out when the next hike might land.
Miura pointed out another piece of the puzzle. “The yen weakened as Ueda did not give a clue on the next rate hike last week. And the weaker yen prompted investors to sell JGBs,” he said.
The yen itself managed to hold some strength against the dollar on Thursday, up 0.11% at 155.715 per dollar. The market’s on edge about possible intervention from authorities, especially after the finance minister issued a strong warning.
The five year yield also changed direction, rising 1 basis point to 1.500%. The 10 year JGB yield nudged up half a basis point to 2.05%.
What you’re seeing here is a bond market trying to process two competing forces. On one hand, there’s relief about potentially less supply of super long bonds. On the other, there’s growing anxiety about the Bank of Japan hiking rates again, which makes shorter term bonds less attractive. It’s a tug of war playing out across different parts of the yield curve, and traders are adjusting their positions accordingly.
