Long term Japanese government bond yields pulled back from multi decade and record highs on Wednesday, although weak demand at a 20 year debt auction highlighted continuing concerns over inflation and rising borrowing costs.
The benchmark 10 year Japanese government bond yield declined 2.5 basis points to 2.775% after rising for seven consecutive sessions and touching a 29 year high on Tuesday.
Japan’s 40 year bond yield, the country’s longest tenure government debt, fell 8 basis points to 4.315% after hitting an all time high in the previous session.
The decline in yields came after recent heavy selling in global bond markets driven by persistent inflation concerns linked to elevated crude oil prices and the ongoing Iran conflict.
Meanwhile, the yield on the 20 year Japanese government bond dropped 5.5 basis points to 3.725%. However, investor demand at the Ministry of Finance auction weakened notably, with the bid to cover ratio falling to 4.01 from 4.82 in the previous auction.
Analysts said inflation concerns and expectations of higher government borrowing continue to pressure Japanese debt markets.
“The sharp rise in the JGB term premium has coincided with an increase in the inflation risk premium,” Barclays analysts Ayao Ehara and Shinichiro Kadota said in a report before the auction.
Japan’s fiscal outlook has also come under focus amid expectations of increased government bond issuance tied to a planned supplementary budget.
Investor attention is also shifting toward the Bank of Japan’s next monetary policy decision. The central bank’s recent hawkish commentary has fuelled speculation of a possible interest rate hike at the June meeting.
Bank of Japan Governor Kazuo Ueda on Tuesday acknowledged the rapid rise in long term interest rates and said the central bank would closely monitor movements in the Japanese government bond market.
Adding to expectations of tighter monetary policy, Japan’s economy expanded at an annualised rate of 2.1% during the first quarter, stronger than market expectations.
Shorter tenure bond yields also continued to rise. The two year Japanese government bond yield climbed 1 basis point to 1.45%, its highest level since May 1995, while the five year yield touched a record high of 2.04%.
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