Japan’s yield curve flattens as 40-year bonds strengthen, but auction outlook remains divided; 100 billions yen to be issued tomorrow with reduced volume

⑴ On Tuesday, the Japanese government bond yield curve flattened, with the 10-year government bond yield rising by 3 basis points to 2.72%, while the 40-year government bond yield fell by 5.5 basis points to 4.09%, showing resilience ahead of tomorrow's auction. ⑵ The Ministry of Finance will issue 300 billion yen of new 40-year government bonds through a Dutch auction, a reduction of 100 billion yen compared to the previous issuance. The Bank of Japan plans to conduct routine bond purchase operations on Thursday, and month-end duration extension inflows are also expected on Friday. ⑶ However, there are differing views within the market. A trader at a Japanese securities firm pointed out that the 30-year and 40-year bonds have already inverted in terms of compounded yield, and investors may be more inclined to buy the 30-year rather than the 40-year bonds. Institutional data show that the yield on the 40-year bonds issued during the week is about 3.84%, while the yield on the actively traded 30-year bonds is about 3.879%. ⑷ The 10-year bond suffered selling pressure at the open, with the benchmark yield rising by 2 basis points to 2.71% in early trading, dipping to 2.695% during the session, but climbing again in the afternoon to reach 2.725%. Futures simultaneously fell to a daily low of 128.17. ⑸ In terms of trading sentiment, regional accounts continued to sell low-coupon bonds with around 13 years maturity, indicating that some investors are still adjusting their yen bond portfolios to enhance their ability to withstand rising yields. A domestic investor sold the 40-year JU17 bond, but this did not push yields higher; the investor may switch into the new 40-year issue in tomorrow's auction.