Japan bonds pare losses after strong auction, but fiscal worries weigh

TOKYO: Japanese government bonds pared early losses on Tuesday after a strong auction of 10-year notes, although worries about Prime Minister Sanae Takaichi’s expansionary fiscal policies and contagion from a French debt selloff weighed on sentiment.

The 10-year yield was up 1.5 basis points at 3.1% as of 0349 GMT, after demand at a sale of the securities rose to the highest since May. Yields move inversely to bond prices.

The 20-year JGB yield pared its advance to 1 bp, putting it at 3.98%. It earlier hit a three-decade high of 3.99%.

The 5-year yield was 2.5 bps higher at 2.385%, also pulling back slightly from an earlier high.

The 30-year JGB yield stood at 4.235%, up 0.5 bp. It hadn’t traded since the auction result, and had started the session by rising to a record 4.24%.

The 2-year JGB yield remained up 2 bps at 1.925%.

Takaichi pledged on Monday to “control” bond issuance and act swiftly against market turbulence, seeking to reassure investors worried about Japan’s worsening public finances.

Meanwhile, French borrowing costs have surged with investors dumping the country’s debt amid worries about the government’s plan to enact an unpopular 2027 budget to lower its deficit and contain its record-high debt load.

“Upward pressure on global interest rates could of course be negative for JGBs, but it is also possible that they could see some ‘flight to quality’ demand alongside German bunds and US Treasuries.

That said, JGBs might not necessarily be viewed as a ‘safe haven’ in the current climate given that so much attention seemingly continues to focus on Japan’s fiscal position,“ said Mizuho market analyst Yuhi Kawano.

Investors will be watching a speech by Bank of Japan Governor Kazuo Ueda later on Tuesday for clues on the pace of further interest rate hikes.