[TOKYO] Japan will auction five-year government bonds on Wednesday (Aug 13) against the backdrop of renewed concerns over poor liquidity and volatility in the nation’s debt market.
The benchmark 10-year bond was not traded at all on Tuesday, the first such instance in more than two years, before seeing transactions on Wednesday, according to data from an institutional brokerage. That lack of liquidity comes against the backdrop of choppy trading in global debt markets.
German 30-year yields climbed to the highest level in 14 years on Tuesday, the latest evidence of growing pressure on longer-dated bonds. This area of the yield curve in Japan has been particularly volatile this year, sometimes following moves in overseas markets, on other occasions causing them.
Meanwhile, yields on short-term US Treasuries slid following inflation data that bolstered the case for a near-term rate cut from the Federal Reserve.
Despite the concerning signs, strategists in Tokyo were mostly sanguine about the five-year JGB sale that takes place around midday in Tokyo.
Kazuhiko Sano, chief strategist at Tokai Tokyo Securities, said that bond prices may decline in the morning but should rebound later in the day, nudging down yields.
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The auction is expected to pass smoothly, said Miki Den, senior rates strategist at SMBC Nikko Securities, noting that the five-year yield has been trading above the level seen at the time of the previous auction. He added that while there were risks of fluctuations in both directions in the near term, the risk of declines was somewhat greater.
The five-year yield rose two basis points to 1.06 per cent on Wednesday morning in Tokyo. After Tuesday’s hiatus, the 10-year yield increased by 1.5 basis points to 1.515 per cent.
Investors will be focused on key demand measures when the results come through at 12.35 pm local time. The average bid-to-cover ratio was 3.54 at the prior sale, and the 12-month average is 3.78.
The tail, or gap between average and lowest-accepted prices, was 0.02 at last month’s auction.
The sale also comes after the Bank of Japan’s policy meeting last month tempered some expectations for a near-term rate hike, with governor Kazuo Ueda rebuffing concerns the central bank is behind the curve in taming inflation. BLOOMBERG
