40-year Auction Goes Poorly

The issuance of 40-year bonds today encountered a tepid reception, with the actual high yield surpassing dealer expectations. The anticipated yield, as per the BBG poll, was projected at 1.80%. However, the realised yield exceeded this projection.

• Adding to the subdued response, the cover ratio witnessed a decline, dropping to 2.208x from 2.95x observed in the late-September auction. This outcome marks a reversal in the trend, as the cover ratio has been steadily increasing since May. Notably, today's ratio represents the lowest level at a 40-year auction since March 2022.
• As highlighted in the auction preview, the 40-year auction took place with an outright yield approximately 20bps higher than the late-September offering but about 25bps lower than the cycle peak of 2.18% recorded in late October.
• It's essential to note that today's auction holds significance as the first 40-year supply following the BOJ’s shift to a 1% YCC reference rate. This outcome stands in stark contrast to the robust demand metrics witnessed at the 20- and 30-year JGB auctions in November.
• The 40-year bond is around 3bp cheaper in early afternoon trading, reflecting a negative response to the auction outcome. JGB futures are also weaker in post-auction trade, having significantly pared this morning’s gains.