Japan Bonds Drop; Volatility Saps 20-Year Sale as Election Looms

Japan’s bonds fell as 20-year yields headed for the biggest gain in almost a week after a debt auction drew weaker demand than primary dealers forecast.

The lowest price at today’s sale of 2034 notes was 101.55 yen, below the 102.05 median forecast of 14 primary dealers surveyed by Bloomberg News. The bid-to-cover ratio reached a five-month low at the 1.2 trillion yen ($10 billion) offering. Yield volatility surged last week after newspapers said Prime Minister Shinzo Abe was planning to delay a sales tax increase and the Bank of Japan expanded record stimulus on Oct. 31.

“The auction results were very weak,” said Takeo Okuhara, a senior fund manager in Tokyo at Daiwa SB Investments Ltd. “Volatility has risen, damping investors’ risk appetite.”

The yield on the 20-year government bond rose five basis points, the most since Nov. 12, to 1.29 percent as of 3 p.m. in Tokyo from yesterday, according to Japan Bond Trading Co. The price of the 1.4 percent security due September 2034 fell 0.81 yen to 101.737. A basis point is 0.01 percentage point.

Thirty-year yields climbed five basis points to 1.47 percent, the most since Nov. 5, while benchmark 10-year yields added 2 1/2 basis points to 0.505 percent.

Last week, the 10-day historical volatility for 20- and 30-year bond yields reached their highest levels since April 2013, when the BOJ first started record asset buying.

Japanese stocks gained and the yen traded near a seven-year low against the dollar today after newspaper reports said Abe will announce the tax plan delay as soon as today after data yesterday showed the economy unexpectedly slipped into a recession. People familiar have said that Abe will call an early election.

Before it's here, it's on the Bloomberg Terminal.