Japan may rely on shorter-term debt to fund reconstruction from its record earthquake, causing the yields on longer-term debt to fall.
The extra yield 20-year bonds offer over five-year notes is 138 basis points, or 1.38 percentage points, four basis points higher than the 13-month low reached on Sept. 22. Yesterday’s sale of five-year debt showed demand was little changed from the two-year low seen in September, while rates on the securities are still about even with Switzerland’s for the least in the world at less than 0.4 percent.
Japan’s primary dealers and institutional investors expect the government to sell notes with maturities of five years or less for the rest of this fiscal year, a Ministry of Finance official said last week. The government is gauging demand for bonds as it compiles its third extra budget, following 6 trillion yen ($78 billion) in measures already announced to cope with the March 11 quake and tsunami.
“Additional debt issuance has been one key fear for the market, keeping upward pressure on yields,” said Akito Fukunaga, Tokyo-based chief rates strategist at the brokerage unit of Royal Bank of Scotland Plc, one of the 25 primary dealers obliged to bid at the government sales. “Super long- term bonds are now less likely to be sold.”
The spending plans add to a record 144.9 trillion yen in debt sales for fiscal 2011 announced in December. Japan may increase a third supplementary budget to more than 12 trillion yen, Seiji Maehara, policy affairs chief of the ruling Democratic Party of Japan, said last week.
Yesterday’s auction of 2.2 trillion yen in five-year notes saw bids valued at 2.72 times the amount on offer, compared with a so-called bid-to-cover ratio of 2.68 last month and a 10-sale average of 3.3. The ministry is scheduled to sell 1.1 trillion yen of 20-year bonds tomorrow.
Most of the primary dealers who attended last week’s meeting with the finance ministry on Oct. 13 expect the extra issuance may total about 2 trillion yen, according to a government official. They expect 200 billion yen will be added to each monthly auction of debt with maturities of five years or less, said the official, who spoke on condition of anonymity.
Japan’s 10-year bonds yielded 1.02 percent today. Yields on similar-maturity Treasuries were at 2.16 percent.
Low Interest Rates
Japan’s government bonds with a maturity of 10 years or longer have handed investors a 0.1 percent loss this month, poised to break the longest stretch of monthly gains since 2003, Bank of America Merrill Lynch data showed.
Primary dealers consider shorter-term securities as stable investments on prospects the Bank of Japan will keep borrowing costs low, the ministry official said after the Oct. 13 meeting.
The central bank kept its benchmark interest rate at a range of between zero and 0.1 percent on Oct. 7. It also left unchanged the 15 trillion yen program that buys assets including government bonds, corporate debt and stock funds.
The two-year overnight-index swap rate, an indication of what traders expect the BOJ’s key interest rate will average during the period, was at 0.07 percent today. The comparable U.S. rate stood at 0.16 percent.
“In an environment where we can’t envision a rate increase by the BOJ, losses in mid-term notes will be limited even if they get sold,” said Shinji Hiramatsu, senior investment manager in Tokyo at Sompo Japan Nipponkoa Asset Management Co. Ltd., which oversees about $50 billion.
Hiramatsu expects consistent purchases of mid-term securities when yields rise as financial companies look for places to park excess funds. Customer deposits at banks surpassed outstanding loans by 164 trillion yen at the end of September, according to BOJ data, more than the combined annual economic output of South Korea and Australia.
Elsewhere in Japan’s credit markets, the extra yield investors demand to hold Japanese corporate debt instead of government bonds was 45 basis points yesterday, compared with 253 basis points globally, according to indexes compiled by Bank of America Merrill Lynch.
Five-year credit-default swaps on Japanese government bonds were at 119.4 basis points yesterday, down 35 basis points from a record reached earlier this month, CMA prices in New York show. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to debt agreements.
Senko Co., an Osaka-based logistics company, sold 5 billion yen of 0.8 percent five-year notes, Daiwa Securities Group Inc. said in an e-mailed statement yesterday.
The DPJ said last month it planned to raise 9.2 trillion yen for rebuilding through temporary tax increases and the sale of the government’s stake in Japan Tobacco Inc.
Signs that the government is trying to limit bond issuance haven’t erased concern about the nation’s ballooning debt, according to Naka Matsuzawa, Tokyo-based chief strategist at Nomura Securities Co., another primary dealer.
Government debt is projected to reach 219 percent of gross domestic product next year, the Organization for Economic Cooperation and Development has forecast.
“An auction plan for the next fiscal year hasn’t been discussed yet,” Matsuzawa wrote in a research note dated Oct. 14. “We need to bear in mind that there is a high chance for sales of long and super-long debt to be boosted over the next year.”
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