JGBs fall after weaker-than-expected 20-year bond auction

Japanese government bonds fell on Tuesday after a 20-year bond auction drew weaker-than-expected demand.

The 20-year JGB yield rose 2 basis points (bps) to 2.595%. The 10-year JGB yield rose 2.5 bps to 1.595%, its highest since July 25.

Yields move inversely to bond prices.


"The auction was relatively firm, but with the current level of the yield and expected demand from pension funds for rebalancing portfolios, it could have been better," said Naoya Hasegawa, chief bond strategist at Okasan Securities.

The auction received bids worth 3.09 times the amount sold, lower than the ratio of 3.15 times at the previous auction in July.

But the tail, or the gap between the lowest and average price, narrowed to 0.13 point from 0.18 point, a sign of improvement.

Takashi Fujiwara, chief fund manager at Resona Asset Management's fixed income investment division, said the market was concerned about the bid-to-cover ratio, which was lower than the 3.24 average of the past 12 months.

The auction, however, is not going to be a trigger for bear steepener, or the shape of the curve where super-long dated bonds rise faster than short-term rates, because of interest rate-hike expectation, Fujiwara said.

Swap rates indicated a 72% chance of the Bank of Japan raising rates by 25 bps to 0.75% at its policy meeting in December.

Yields on Japan's super-long bonds are under upward pressure as the market weighs the country's fiscal health. The yield on 30-year bonds hit a record high in July.

The two-year JGB yield inched up 0.5 bp to 0.83%. The five-year yield rose 2.5 bps to 1.14%.

(Reporting by Junko Fujita; Editing by Subhranshu Sahu)