PREVIEW - 20-Year JGB Auction Due

The Japanese Ministry of Finance (MOF) will today sell Y1.2tn of 20-Year JGBs, re-opening JB#186. The MOF last sold 20-year debt on 17 October 2023, the auction drew cover of 2.973x at an average yield of 1.553%, an average price of 99.18, a high yield of 1.589%, a low price of 98.65, with 2.8688% of bids allotted at the high yield.

• Today's issuance of 20-year JGBs follows a challenging reception in October, marked by a low price that fell below dealer expectations and a sharp decline in the cover ratio from 3.942x in September to 2.973x. It's noteworthy, however, that September's cover ratio was the highest observed at a 20-year auction since mid-2020.
• In contrast, the November supply of 30-year JGBs saw positive outcomes, with improved demand metrics across the board. Notably, the tail shortened, though it's important to mention that October witnessed the longest tail for a 30-year auction since June 2019.
• The current auction features an outright yield approximately 10bps lower than the level seen in October and around 30bps lower than the cycle high set late in October. While one might anticipate reduced demand in isolation, it's crucial to consider the improved sentiment towards longer-dated bonds globally in November, especially following positive inflation data. A case in point is the 20-year US Treasury auction yesterday, which demonstrated better-than-feared demand metrics.
• The bid tone today may also find support in the growing optimism regarding the BOJ’s policy outcome, as indicated in the latest insights from the MNI policy team in Tokyo. The team suggests that the BOJ is looking for signs of positive wage growth to confirm a turn in the wage-price cycle (see this link for details).
• There are however negative factors worth considering as well. Notably, the 10/20 yield curve has flattened around 10bps since mid-October. Furthermore, the 20-year JGB is trading at a much less attractive level in comparison to the 10/20/30-year butterfly spread at the last auction.
• Results are due at 0335 GMT / 1235 JST.