[TOKYO] Japan’s government plans to cut sales of super-long bonds by about 10 per cent from its original plan in a rare revision to its bond programme for the current fiscal year, trimming overall bond issuance as a result, a draft document seen by Reuters showed.
The move aims to soothe market oversupply concerns, after weak demand at recent auctions and a surge in super-long yields to record highs last month rattled the bond market. The step also follows the Bank of Japan’s decision this week to slow its tapering of bond purchase from next fiscal year, signalling caution as it removes remnants of its massive, decade-long monetary stimulus.
The revised issuance plan will be presented to primary dealers for discussion at a meeting on Friday. Additionally, there are also proposals to buy back some previously issued super-long JGBs with low interest rates to better balance supply and demand.
The planned reduction in 20-, 30- and 40-year super-long bond sales would be partly offset by increased issuance of shorter-term notes, as well as bonds specifically designed for households.
As a result, the total Japanese government bond (JGB) scheduled sales for the year through next March are set to fall by 500 billion yen (S$4.42 billion) to 171.8 trillion yen, according to the draft of the revised bond programme.
Issuing a larger amount of shorter-term bonds, however, would require a careful balancing act as the government would need to roll over debt more frequently and make its finances more vulnerable to bond market swings.
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Specifically, the revised plan calls for reducing 20-year JGB sales by 900 billion yen to 11.1 trillion yen, 30-year JGBs by 900 billion yen to 8.7 trillion yen and 40-year JGBs by 500 billion yen to 2.5 trillion yen.
This means starting next month, sales of each of these tenors will be cut by 100 billion yen at every auction.
Instead, the government will boost sales of two-year debt, one-year and six-month treasury discount bills by 600 billion yen each. At every auction starting October, sales of two-year debt will be raised by 100 billion yen to 2.7 trillion yen.
The government will also increase issuance of principal-guaranteed JGBs for households by 500 billion yen.
Debt markets rallied on the news with an auction of five-year JGBs seeing the highest demand in almost two years. Bonds extended gains in the afternoon session on Thursday, led by shorter-dated securities. The five-year yield fell 4 basis points to 0.965 per cent. Yields move inversely to bond prices. The longest dated bonds fell, with the 30-year yield rising 1.5 basis points to 2.945 per cent.
The original plan had called for cuts in 30- and 40-year bond sales to reflect shrinking demand from life insurers who mostly completed purchases of longer-dated bonds to comply with new solvency regulations. But as the worsening finances of advanced economies drew more market scrutiny, super-long JGBs became a target of a global bond selloff last month.
“It was a (positive) surprise to the market that the government is not increasing sales of five-year JGBs in the revision,” said Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management.
“But heavier reliance on shorter-term bonds is a sign of Japan’s falling credit quality. Essentially, it’s not the ministry of finance’s responsibility but lawmakers’ to carry out debt management with a sense of crisis.” REUTERS
