Japan to cut ultra-long bond supply by ¥100 billion in October, December auctions

Japan is cutting back on its ultra-long bond supply in October and December by ¥100 billion ($675 million) at each auction, trimming the amount offered to ¥250 billion from ¥350 billion, the Ministry of Finance announced after meeting with primary dealers on Wednesday.

The decision affects bonds maturing between 15.5 and 39 years, which are part of the enhanced liquidity auctions. This is the second reduction this year targeting this specific end of the curve. The October and December cuts follow continued caution from policymakers amid volatile demand for long-term paper.

Japan is also auctioning its 40-year bond on Thursday, with the results due at 12:35 p.m. Tokyo time. Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management, told reporters the reduction was “neutral to positive” and said, “I expect the sale of tomorrow’s 40-year bond to be absorbed without difficulty.”

Finance ministry pushes up short-term bond issuance

While Japan is scaling back the super-long end, it’s raising issuance on the other side of the curve. In November, bond offerings with maturities longer than one year but shorter than five years will increase from ¥600 billion to ¥700 billion.

Inadome said the change would likely be welcomed by domestic banks. “The increased allocation for the 1-year to 5-year range is expected to attract demand from banks. This is the most stable supply-demand zone, so excessive concern is unnecessary.”

The ministry sent out a questionnaire in August to gather feedback from dealers before deciding to adjust the size of the auctions. The tweaks come as super-long yields remain near multi-year highs, and as the Bank of Japan continues to wind down its massive bond-buying program.

Political risk is also bleeding into the bond market. After Prime Minister Shigeru Ishiba announced plans to resign earlier this month, investors began speculating on the next government’s fiscal stance. “Going forward, whether politicians maintain fiscal discipline will become as important, if not more so, than the Ministry of Finance’s supply-demand measures,” said Inadome.

Foreign investors load up on long bonds as curve flattens

A surprising tilt by the Bank of Japan toward higher rates and fading fears about fiscal disaster have created an opening for foreign investors, who’ve been snapping up Japan’s super-long bonds for months.

Their strategy? A flattening of the Japanese Government Bond (JGB) yield curve, where short-term rates rise and long-term rates fall. The curve has been acting exactly how they hoped.

Short-term yields jumped Monday to the highest since the global financial crisis, after two BOJ board members voted in favor of a rate hike on Friday. At the same time, yields on 20- and 30-year bonds slipped. The so-called twist flattening has been playing right into the hands of those betting against steep curves. 

The overall direction of yields continued on Wednesday, with most sliding lower in sync with U.S. Treasuries. Japan’s markets were closed on Tuesday for a national holiday.

Uncertainty around who will take Ishiba’s place has also calmed long-term rate fears. After Ishiba’s resignation, Sanae Takaichi, a Liberal Democratic Party leadership contender, backed away from earlier calls for aggressive spending. Speaking at a press conference on Friday, she clarified she never opposed fiscal discipline, saying she would not immediately pursue any sales tax cuts.

That helped bring down 30- and 40-year bond yields to one-month lows on Friday. Yunosuke Ikeda, chief macro strategist at Nomura Securities, said, “I expect a stabilisation in 30-year yields. The market was clearly misreading the probability and potential impact of a VAT cut.”

He also noted earlier concerns about a possible ratings downgrade for Japan had eased. “A while ago, people were actually talking about a potential downgrade for Japan, but the current situation doesn’t look at all like Japan is at risk of a rating cut,” he said.

Back on September 8, the day after Ishiba said he would step down, the 30-year yield spiked to a record 3.285%. But foreign traders didn’t flinch. They’ve remained net buyers of super-long JGBs for eight straight months through August, based on data from the Japan Securities Dealers Association.

Their net purchases peaked in April at ¥2.3 trillion ($15.56 billion), compared to just ¥27 billion bought by life insurers, who have traditionally dominated this part of the market.

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