Japan’s short-dated bonds fall on Fed hold; superlong bonds gain

TOKYO: Japanese government bonds were mixed on Thursday, with shorter-dated notes easing in line with overnight moves for US peers, while longer-dated securities continued to be buoyed by the previous day’s strong 40-year JGB auction.

US Treasuries sank on Wednesday, pushing yields higher, after the Federal Reserve held interest rates and sent a less dovish signal on further easing.

That helped lift 10-year JGB yields by 1.5 basis points to 2.25%, while five-year yields added 1 bp to 1.675% and two-year yields rose 0.5 bp to 1.25%.

Benchmark 10-year JGB futures slipped 0.20 yen to 131.52 yen.

However, so-called superlong bond yields extended declines from Wednesday, when a sale of 40-year paper drew robust demand, potentially boding well for auctions of 10- and 30-year JGBs next week.

The 40-year yield sank 5 bps to 3.86%, while the 30-year yield retreated 1.5 bps to 3.62% and the 20-year yield fell 1 bp to 3.16%.

Still, Japanese yields remain not far from all-time peaks reached across tenors in recent days, with investors jittery about the potential for vastly expanded fiscal stimulus should Prime Minister Sanae Takaichi expand her coalition’s parliamentary majority in snap elections on February 8.

A Nikkei newspaper poll on Thursday showed Takaichi’s Liberal Democratic Party is likely to be able to win a majority of seats even without coalition partner Ishin. Such a scenario would strengthen her hand to undertake plans to reflate the economy.

“For the time being, the market is likely to be sensitive to the risk of fiscal expansion around the election, so interest rates are expected to remain elevated,” Mizuho Securities analysts wrote in a research report.

“At the same time, a large-scale issuance of government bonds in the market and a full-scale erosion of confidence in Japan’s finances are expected to be avoidable, so the fiscal risk premium is likely to shrink in the medium term.”