JGB yield curve continues to flatten as 20-year action draws firm demand

Japan's government bond (JGB) yield curve maintained its flattening trend on Thursday, as foreign investors supported demand for a 20-year bond auction, the first after Prime Minister Sanae Takaichi's tax-cut pledge had sent its yield to record highs last month.

The 20-year debt auction drew firm demand as Takaichi's landslide election win on February 8 gave investors confidence that her ‌government will ⁠not resort ⁠to a too-loose fiscal policy as some of the opposition parties had called for.

"The auction outcome ​was moderately firm and demand was led by foreign investors who can get extra yields by ​buying hedged JGBs," said Takashi Fujiwara, chief fund manager at Resona Asset Management's fixed income investment division.


The tender took place a month after a weak 20-year auction triggered ​a meltdown at the super-long-dated JGBs. On that ⁠day, Takaichi called ‌a snap election and pledged to cut sales taxes on food, ​sending the ​20-year bond yield nearly 20 basis points higher on concerns about ⁠the nation's strained finances.

Yields on super-long JGBs have been ​declining since the sweeping election victory by Takaichi's Liberal Democratic Party, ​while falls in shorter-dated yields have been contained in a days-long curve flattening trend.

"Market's worries about political instability have been removed after Takaichi's big win, while the finance ministry's reduction in issuance of super-long dated bonds has been a support for investor appetite," Fujiwara said.

Growing bets the Bank of Japan will hike interest rates earlier ‌than expected have also limited declines in yields on shorter-dated bonds.

The 20-year JGB yield fell 1.5 basis points (bps) to 2.955% on Thursday. The ​30-year bond ​yield fell 4 bps to ⁠3.33%. The 40-year JGB yield fell 3 bps to 3.575%.

Even before last month's market ructions, foreigners have been aggressively buying Japan's super-long-dated bonds after a huge selloff of those ​bonds last year made their prices cheap.

"That appetite continues as worries about fiscal expansion weakened," said Miki Den, a senior Japan rate strategist at SMBC Nikko Securities.

Meanwhile, the 5-year JGB yield rose 1 bp to 1.63%, and the 10-year JGB yield inched up 0.5 bp to 2.14%. The two-year bond yield rose 0.5 bp to 1.24%.