Japan’s 40-year bonds rally before auction; 5-year yields at 17-year high

TOKYO: Japan’s longest-dated government bonds rallied on Tuesday ahead of a sale of securities whose yields recently hit record highs, while shorter-term papers fell on expectations the Bank of Japan may be closer to raising its policy rate.

The 40-year Japanese government bond (JGB) yield fell 1 basis point (bp) to 3.67%, retreating from an unprecedented 3.745% reached on Thursday.

The 30-year yield edged 0.5 bp lower to 3.315%, down from a record 3.39% last week.

Yields move inversely to prices.

JGBs sank last week as details about Prime Minister Sanae Takaichi’s economic stimulus plan spurred concerns about the nation’s finances.

The cabinet on Friday approved a 21.3 trillion yen ($135.95 billion) spending package, significantly larger than the previous year’s.

“The rise in interest rates reflects persistent concerns about fiscal expansion and weak supply-demand dynamics,” Mizuho Securities chief bond strategist Noriatsu Tanji wrote in a note.

“However, in the 40-year zone, where many participants prioritise absolute interest rate levels, the high interest rate level itself should be positive.”

Takaichi said in a speech on Friday that her spending plan would be funded with new bond issuance if tax revenue is not sufficient, and overall JGB issuance is expected to be smaller than last year’s.

The Ministry of Finance is due to sell about 400 billion yen in 40-year JGBs on Wednesday.

Demand at the sale may be weak due to many unknowns about the government’s financing plans, said Naoya Hasegawa, chief bond strategist at Okasan Securities.

“The yield level is attractive, but it is not the time to hurry up and buy bonds, with the market awaiting government plans for JGB issuance for next year,” Hasegawa said.

The BOJ is “nearing” a decision to raise interest rates, board member Kazuyuki Masu was quoted as saying in a Nikkei newspaper report over the weekend. The remark follows those by Governor Kazuo Ueda on Friday signalling the chance of a December rate hike.

The two-year JGB yield rose 1 bp to 0.96%, and the five-year yield rose 1.5 bp to 1.325%, both the highest since June 2008.