U.S. Treasury Bond Yields Rise Above Domestic Counterparts Following Robust Employment Report
Tokyo's Bond Market Shows Lower Demand for Long-Term Bonds
Japan's bond market displayed a change in investor sentiment on Monday, as the 10-year Japanese Government Bond (JGB) yield climbed by 1.5 basis points to 1.470%. This surge follows a rise in non-farm payrolls for May and surpassed economist predictions in the US, causing traders to reassess their bets for a near-term Federal Reserve interest rate cut.
The two-year and five-year yields respectively rose by 1.5 bps and 2 bps, moving to 0.775% and 1.030%. The nine-year JGB yield jumped 11.5 bps on Friday.
Investors' new projections reveal a 63% likelihood of a Federal Reserve rate cut by September, down from 74% before the release of the jobs data. Benchmark 10-year JGB futures slid 0.18 yen to 139.17 yen, with yields rising as bond prices fall. Moreover, the 20-year and 30-year yields advanced by 2.5 bps and 3.5 bps, settling at 2.355% and 2.910% respectively.
Surprisingly, these yields remain far from their peaks seen in the previous month. A quarter-century high for 20-year JGBs was 2.600%, and 3.185% for 30-year JGBs.
The unexpected decrease in investor demand recently became evident in the 30-year JGB auction's bid-to-cover ratio, which reached 2.92 - the lowest figure since December 2023. The bid-to-cover ratio is a crucial measure of auction demand that compares the volume of bids to the quantity of securities available. This decrease aligns with reduced investor appetite for long-term bonds, as concerns persist over rising global yields, market uncertainty, and lingering doubts about Japan’s monetary policy and inflation outlook.
Indeed, a larger "tail" at the most recent auction suggests caution from investors, with more bids situated at lower prices than the accepted average. These findings indicate that investors are more reluctant to commit to long-term rates, given the potential for future rate hikes or inflationary pressures.
Yunosuke Ikeda, chief macro strategist at Nomura, claimed that a "kind of built-in stabilization system is at work," which could indicate a shift in the market. According to Ikeda, the poor auction results prompted Japan's finance ministry to consider decreasing the issuance of super-long debt, creating a sense of a stabilizing force amidst the declining market sentiment.
(Enrichment Data: Overall, the drop in the bid-to-cover ratio for Japan's 30-year bond auction highlights lower investor demand, driven by rising global yields, market caution, and ongoing economic uncertainty. Key factors behind the decline include concerns about rising bond yields worldwide, market sentiment, economic uncertainty, and the comparative weakness of Japan's auction compared to previous sales and the 12-month average.)
- Tokyo's bond market witnessed a shift in investor preference, as the demand for long-term bonds appears to have decreased, potentially due to rising global yields, market uncertainty, and lingering doubts about Japan's monetary policy and inflation outlook.
- The bid-to-cover ratio for Japan's 30-year bond auction reached an 11-year low, suggesting that investors are becoming more cautious in committing to long-term rates, given the potential for future rate hikes or inflationary pressures.
- In the finance industry, a smaller bid-to-cover ratio serves as a crucial indicator of auction demand, with a lower figure signifying reduced investor appetite for long-term bonds.
- Yunosuke Ikeda, chief macro strategist at Nomura, observed a possible stabilizing force in the market, hinting at a potential shift, as Japan's finance ministry considers decreasing the issuance of super-long debt.
- Investors in the defi, finance, and trading industry may interpret these trends as a signal to reconsider their long-term investing strategies in the industry, especially when it comes to investing in Japanese Government Bonds (JGBs) and other long-term bonds.
