Japan's longer-dated government bond yields declined on Thursday, mirroring moves in US Treasuries after the US Treasury Department announced an expansion of its bond repurchase operations to curb rising long-term borrowing costs. Ahead of Thursday's 20-year bond auction, yields on both the 30-year and 20-year Japanese government bonds dropped by at least 8 basis points.
The US Treasury's decision to scale up buybacks of longer-dated securities helped pull the 30-year US Treasury yield back from its highest level since 2007. "The key question now is whether Japanese authorities can adopt similar measures to address upward pressure on yields," said Rinto Maruyama, senior foreign exchange and interest rate strategist at SMBC Nikko Securities Inc. "Further shortening the bond issuance maturity is one policy option that could attract attention," Maruyama noted, adding that even the 10-year bond could be included in the scope of maturity reduction, as has been the case previously.
The benchmark 10-year Japanese government bond yield fell 5 basis points to 2.84% on Thursday. As the 10-year yield approaches the key milestone of 3%, speculation is growing that Japanese authorities may step in to calm the yield surge. While elevated yields could help attract demand for Japan's latest bond issuance, duration risk across longer-dated bonds globally remains a major headwind.
Auction results are scheduled to be released at 12:35 pm Tokyo time. Investors will be closely watching the bid-to-cover ratio and tail demand to gauge the market's capacity to absorb supply. Domestic pressures have further intensified the challenging environment. Japanese government bond yields have climbed sharply as investors increase bets that the Bank of Japan will hike rates again soon, while concerns over the government's expansionary fiscal policy have also weighed on long-end yields.
According to sources familiar with the matter, the administration of Prime Minister Takaichi Sanae supports a near-term rate hike to address the yen's persistent weakness. Overnight index swaps indicate roughly a 76% probability of a rate increase before September, while an October hike has been fully priced in. Although Japan and the US conducted their first coordinated intervention since 1998 last month, buying yen and briefly pushing the currency to around 155 against the dollar, pressure on the Bank of Japan to tighten policy has intensified as the yen approaches 160 again. Further yen weakness could push up import costs and exacerbate inflationary pressures.
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