(Bloomberg) — An auction of 20-year Japanese government bonds Thursday will beam the searchlight back on rising yields as a looming election heightens concerns about fiscal expansion.
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The sale is just one of several in major debt markets this week as increasing yields on some longer maturities show how investors are worried about widening budget deficits. While yields on 10-, 20- and 30-year Japanese bonds moved lower during morning trade in Tokyo, they remained within reach of recent highs.
“It is unlikely that major Japanese institutional investors, including banks and life insurers, will actively bid” in the auction, as they await the results of the July 20 election and their impact on fiscal policy, said Ryutaro Kimura, a senior fixed-income strategist at AXA Investment Managers Japan Ltd. in Tokyo.
Speculation of less demand comes amid risks to the budget with the ruling Liberal Democratic Party and its coalition partner seeking to entice voters with cash handouts while opposition lawmakers push for lower taxes. In addition, uncertainty over tariffs, with Japan scrambling for a deal after US President Donald Trump announced they will be increased to 25% from Aug. 1, may deepen the risk of the economy entering a technical recession.
The auction results are due at 12:35 p.m. Tokyo time, and traders will be on the watch for the bid-to-cover ratio, which measures the level of interest from investors. Another important metric is the tail, which measures the gap between the average and lowest-accepted prices. A wider reading tends to indicate weaker demand.
The 20-year bond auction may be supported by a reduction in issuance and the relatively stable liquidity of 20-year debt within the super-long sector, wrote Kazuya Fujiwara, a fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities, in a report.
Last month’s 20-year bond sale showed some wariness in the market, even after the government adjusted its borrowing plan to calm surging yields. Japan will trim the volume of 20-, 30- and 40-year bonds sold in regular auctions by a combined ¥3.2 trillion ($22 billion) through the end of March 2026. The changes came into effect from July, and though this helped some recent sales such as the 30-year last week, yields have still pushed higher.
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