Japan to cut down 20-yr bond issuance

Japan's Ministry of Finance is set to accelerate a planned reduction of 20-year bond issuance by 200 billion yen ($1.39 billion), moving the cut from April to January. The adjustment aims to counter diminishing investor interest in long-dated debt amid rising interest rates. The plan involves decreasing the volume of 20-year Japanese Government Bonds (JGBs) sold per auction from 1.2 trillion yen to 1.0 trillion yen.

Analysts and traders note that, with few exceptions, this year's sales of 20-year JGBs have been lacklustre. The recent auction in December recorded the lowest demand since September of the previous year, which was the weakest bid in a decade.

The Ministry of Finance increased the issuance of 20-year JGBs when the Bank of Japan's aggressive stimulus pushed 10-year JGB yields below zero. This move rendered shorter-dated securities unattractive for regional banks and smaller lenders. However, a policy adjustment by the Bank of Japan a year ago opened the possibility of a significant rise in yields across the curve, allowing these banks to opt for shorter tenors better suited to their portfolios.

Shoki Omori, Chief Japan Desk Strategist at Mizuho Securities, expressed skepticism about whether the planned reduction would be sufficient to address the low demand for 20-year bonds. He noted, "It's obviously oversupplied. There is still going to be a lack of demand."

The benchmark 20-year JGB yield reached a 3.5-month low of 1.345 per cent on the day of the announcement, with yields falling across the curve after the Bank of Japan maintained ultra-easy stimulus settings and retained its dovish forward guidance.

The decision to accelerate the cut in 20-year bond issuance reflects the challenges posed by changing market dynamics and underscores the impact of rising interest rates on the demand for long-dated debt instruments. The move seeks to align with the evolving preferences of investors in the Japanese bond market.

(With Reuters inputs)