PREVIEW - 40-Year JGB Auction Due

The Japanese Ministry of Finance (MOF) will today sell Y700bn of 40-Year JGBs, re-opening JB#16. The MOF last sold 40-year debt on 25 May 2023, the auction drew cover of 2.377x at a high yield of 1.385%, a low price of 97.40, with 53.9393% of bids allotted at the high yield.

• At the late May auction, 40-year supply was successfully absorbed by the market, with the high yield coming in below dealer expectations. However, the cover ratio declined to 2.377x, its lowest level since Nov’22 as the flattening and richening of the yield curve appeared to reduce demand relative to the late March auction.
• Today’s supply follows the lacklustre demand seen at the 30-year JGB auction in early July. At the time, the allure of a new issue and an opportunity to extend portfolio duration were more than offset by a lower outright yield and a slightly flatter yield curve. In contrast, the 20-year supply in mid-July saw a stronger bid, supported by a higher outright yield and a steeper yield curve.
• The current 40-year auction takes place with the outright yield at a similar level to the previous outing in late May despite a period of significant volatility since the last outing. In late June, the 40-year yield had reached a new cycle low but rose in early July due to speculation about a possible YCC adjustment by the BoJ during this week's policy meeting. Later, the yield returned to its current level as sources close to the BoJ suggested that the board was leaning towards maintaining the existing approach in the upcoming policy meeting.
• The yield curve is also at a similar level to the late May auction. It is also important to note the steepness of the curve from a longer-term perspective.
• While today's auction occurs ahead of the BoJ's policy decision on Friday, potentially leading to lower demand, the supply is expected to be adequately absorbed. This is due to the underlying trend of local participants shifting their portfolios from hedged offshore debt to Yen bond holdings.
• Results are due at 0435 BST/1235 JST.