[TOKYO] Japan’s larger-than-expected cut to super-long bond issuance has the potential to ease some upward pressure on yields just before an auction this week that risks reigniting turmoil in the debt market.
The move by the finance ministry may also prove fortuitous in light of the US attack on Iranian nuclear sites over the weekend. The escalating military action adds to the dangers for super-long yields via higher oil prices and inflation, even if the knee-jerk reaction on Monday (Jun 23) pulls bonds the other way as investors seek havens.
While the conflict in the Middle East will complicate the picture in markets, the plan to reduce sales of 20-, 30- and 40-year bonds by a total of 3.2 trillion yen (S$28 billion) to March next year was initially judged by rates strategists in Tokyo as a calming factor for trading in this key sector. The changes were presented by officials late Friday during a meeting with primary dealers.
“The ministry publicised its revised plan sooner than anticipated to ward off the risk of a failed 20-year bond auction on Jun 24 and to avert the market volatility seen in May,” Shoki Omori, chief strategist at Mizuho Securities, said immediately after the news. “In light of these announcements, super-long-term auctions are poised to regain a measure of stability.”
The latest plan includes a reduction in 20-year bond sales that is twice the size suggested in earlier draft documents seen by Bloomberg and other media. A poorly received auction of this maturity debt last month set a fire under super-long yields in Japan and that spread in global markets.
The positive impact the ministry may have through adjusting issuance does not overcome the challenge to Japan posed by consumer prices that are rising at the fastest pace in several years, and an election this summer which is likely to encourage more government spending.
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The changes presented on Friday also risk shifting some of the problem, rather than eliminating it, by increasing the issuance of shorter-dated debt.
“Whether the decline in liquidity and high volatility in super-long bonds will improve will depend on if there is solid demand in the upcoming 20 and 30-year bond auctions,” Mari Iwashita, executive rates strategist at Nomura Securities, said on Friday. Still, she noted that the extra reduction for the 20-year bond issuance is “positive for the bond market”.
The 30-year auction is set for Jul 3.
Katsutoshi Inadome, a senior strategist at Sumitomo Mitsui Trust Asset Management, said it was puzzling that the ministry had now moved so aggressively to reduce 20-year bonds rather than the 30-year maturity, where there are also supply and demand issues. He said on Friday that there was still a possibility that the reduction in 30-year bonds could be expanded further.
The planned revision to issuance was the second move by policymakers last week to respond to challenges that have emerged in Japan’s bond market.
The Bank of Japan said earlier in the week that it would slow down its withdrawal from the market from next year in a move aimed at ensuring stability.
A ministry official briefing reporters on Friday said that the plan would likely become officially approved on Monday or Tuesday.
On buybacks, the official said that some market participants had asked for purchases of super-long bonds while others said buybacks would hurt the autonomy of the market. The ministry was not working on implementing buybacks for now, and that was not something that could be implemented soon.
More details of the bond-issuance changes:
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40-year bond issuance will be cut by 0.5 trillion yen to 2.5 trillion yen.
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30-year bond issuance will be cut by 0.9 trillion yen to 8.7 trillion yen.
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20-year bond issuance will be reduced by 1.8 trillion yen to 10.2 trillion yen.
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Two-year bond issuance will be increased by 0.6 trillion yen to 31.8 trillion yen.
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One-year issuance will be increased by 0.3 trillion yen to 38.7 trillion yen.
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Six-month issuance will be increased by 1.8 trillion yen to 4.2 trillion yen.
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Overall issuance of bonds to the market will edge down by 500 billion yen to 171.8 trillion yen for the year. BLOOMBERG
