Market players expect better demand to emerge at Thursday's 1.1 trillion yen ($12 billion) 20-year sale. "The 20-year yield has risen to around 2.15 percent, a level where demand from investors like life insurers is expected to emerge," said Makoto Yamashita, chief Japan interest rate strategist at Deutsche Securities. "The auction outcome should thus be fairly decent." Since the previous auction of the maturity more than a month ago, the 20-year yield has moved between a low of 2.05 percent and a high of 2.165 percent, a two-month peak struck earlier in the month.
On Wednesday the yield was at 2.140 percent, unchanged on the day. Some also said that recent stock market gains, normally seen as a negative factor for government debt, may also help the 20-year sale. "Better economic prospects, as exemplified by strong stocks, lessen the need for government stimulus and therefore reduce the fiscal risk premium on JGBs," said Genji Tsukatani, head of fixed income investment management at asset manager Schroders.
Tokyo's Nikkei stock average last week hit a 15-month high. The JGB yield curve has steepened over the past year, as short- and medium-term JGBs have outperformed on the back of the Bank of Japan's low interest rate policy. The five-year/20-year yield spread stood at 163 basis points, sticking close to a decade high above 165 basis points struck earlier in January. By contrast, longer-term bonds have been more vulnerable to concerns about rising debt issuance. Japan will issue 144.3 trillion yen in government bonds to the market in fiscal 2010/11 starting in April 2010, up 4.9 percent from this year's record high.
In Japan and elsewhere, superlong debt issuance is on the increase, and there are also concerns about fiscal deficits and sovereign risk, he said. Lead March 10-year JGB futures fell 0.06 point to 139.15, trimming earlier losses as the Nikkei fell into negative territory. The benchmark 10-year JGB yield rose 0.5 basis point to 1.330 percent. The five-year yield was unchanged at 0.510 percent.