PREVIEW - 20-Year JGB Auction Due

The Japanese Ministry of Finance (MOF) will today sell Y1.2tn of 20-Year JGBs, opening JB#186. The MOF last sold 20-year debt on 14 September 2023, the auction drew cover of 3.942x at an average yield of 1.433%, an average price of 94.87, a high yield of 1.437%, a low price of 94.80, with 89.3009% of bids allotted at the high yield.

• The issuance of 20-year JGBs today comes after a successful absorption of 20-year supply in September. The low pricing came in below dealer expectations, and the cover ratio surged, marking the highest level seen in a 20-year auction since mid-2020. The auction's tail was notably shorter compared to the previous one, which wasn't particularly challenging, considering that the August auction produced one of the lengthiest results since 2018.
• However, today's auction follows a series of mixed to subpar outcomes for the October supply of 10- and 30-year JGBs. The 10-year JGB auction low-price surpassed dealer expectations, and the tail shortened, though the cover ratio dipped. In contrast, the 30-year JGB witnessed lacklustre demand metrics across the board. Notably, the tail extended, making it the longest for a 30-year auction since June 2019.
• While one might expect that a yield similar to what was observed at last month’s auction should deliver a similarly positive result today, it's crucial to recognise that recent auctions of longer-dated securities suggest that local investors may be leaning towards seeking higher yields or taking more time to evaluate the BOJ’s policy outlook before significantly increasing their allocations to longer-dated JGBs.
• Additionally, it's worth noting that the outright yield is approximately 15bps lower than its cycle high set earlier this month.
• There are however other positive factors worth considering as well. Notably, the 10/20 yield curve remains around its steepest since March. Furthermore, the 20-year JGB is trading at a much more attractive level in comparison to the 10/20/30-year butterfly spread than in mid-September.
• Results are due at 0435 BST/1235 JST.