Japan’s 20-year bond auction gets weakest demand since 2012

[TOKYO] Japan’s auction of 20-year bonds got the lowest demand since 2012, pointing to market concern about who will buy as the Bank of Japan (BOJ) dials back its huge debt holdings.

The average bid-to-cover ratio was 2.5 at the Ministry of Finance’s one trillion yen (S$8.9 billion) sale of March 2045 bonds, the lowest since August 2012, compared with 2.96 in the last auction. In another sign of sluggish demand, the tail, or the gap between average and lowest-accepted prices, came in at 1.14, the biggest since 1987.

Japanese bond futures plunged, and the benchmark 10-year yield rose to 1.525 per cent, the highest since late March.

The BOJ will sound out market participants this week to gauge their views on how aggressively it should proceed with quantitative tightening as yields increased sharply nearly a year after it began scaling back its huge bond purchases. Even though foreigners bought record amounts of super-long Japanese bonds in April, their presence in the market is still small.

“The results were even worse than I had expected,” said Katsutoshi Inadome, a senior strategist at Sumitomo Mitsui Trust Asset Management. “Thirty- and 40-year bonds were being sold due to fiscal expansion risks and declining liquidity, but deteriorating market conditions have now spread to 20-year bonds, which had been relatively stable.”

The sale comes after a recent surge in longer Japanese bond yields and increased volatility owing in part to US President Donald Trump’s policy measures. Traders are also focusing on how the US downgrade by Moody’s Ratings last week may also affect Japan’s fiscal policy debate. BLOOMBERG