Japan’s long-term borrowing costs have jumped to their highest levels for more than a year as investors and traders brace for a summer deluge of bonds issued by the government to fund its Covid-19 fightback.
The yield curve — which shows the extra yield demanded for debt as its maturity lengthens — has steepened for Japanese government bonds, as it has for other countries such as the US that are also borrowing and spending heavily to counter the economic effects of the virus.
Traders of JGBs said this trend was due to nerves about market appetite for the coronavirus-driven supply glut from July, but also doubt over how much longer-dated debt the Bank of Japan will buy under its long-established policy of yield curve control.
“The market has basically decided that the BoJ wants the yield curve to steepen and will hold back on buying much at the super-long end of the curve,” said one Tokyo-based bond trader, who asked not to be named. “Everyone is on high alert at this point for confirmation that we’re guessing the BoJ correctly.”
Traders’ bets on the appetite of the BoJ and other buyers such as life insurers and pension funds have sent long-term bond prices falling, pushing the 30-year JGB yield up to more than 0.5 per cent, the highest since May 2019. It has also caused the spread between 20-year and 30-year debt to widen to more than 0.15 percentage points in recent days.
That gap could increase yet further, say strategists. “The market might currently not be pricing in a further increase in supply should the current issuance plan underestimate the drop in tax revenue from weaker economic activity,” warned Société Générale economist Takuji Aida.
The BoJ’s fine-tuning of the JGB yield curve is closely watched around the world as more central banks take the path towards low or negative interest rates, and outsized borrowing and bond-buying programmes, that Japan has been pursuing for many years.
Since Covid-19 took hold earlier this year, Japanese policymakers have unleashed waves of fiscal and monetary stimulus to support the economy, estimated by Fitch Ratings as amounting to 10 per cent of the country’s economic output.
Japan’s finance ministry last week announced that it would increase the supply of JGBs for the financial year ending March 2021 to Y253tn ($2.3tn) from the initial plan of Y153tn — the third upward revision since April. About Y23tn of the increased issuance will be interest-bearing, which means that from July, issuance of 30-year JGB will rise from about Y700bn at each auction to Y900bn.
Shuichi Ohsaki, chief Japan rates strategist at Bank of America, said attention at future auctions would focus on whether the BoJ increases its bond purchases in step with the new issuance. It might choose not to increase its purchases of 25-year debt and longer, he said, because of its concern about the risk posed to life insurers and pension funds from “excessive flattening” of the curve. These institutions rely on long-dated debt to match their liabilities.
Such a move by the BoJ would risk disrupting the supply-demand relationship in shorter-dated debt, Mr Ohsaki added. A higher 20-year yield “could put upward pressure” on the 10-year yield, which is the target of the yield curve control policy, he said.