JGB Auction Yields at BOJ ‘Upper Limit’, pressure on higher interest rates persists

THE NIKKEI via scoutAsia

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July 5, 2022 4 min read
JGB Auction Yields at BOJ ‘Upper Limit’, pressure on higher interest rates persists

In the 10-year government bond auction conducted by the Ministry of Finance on 5th, the highest bid was 0.25%, at the "upper limit" set by the Bank of Japan. This reflects the upward pressure on interest rates as foreign investors continue to sell government bonds. With interest rates rising globally, there is a persistent view that the BOJ will be forced to modify its monetary easing policy sooner or later.

The highest yield on the 10-year bond auction was 0.2500%, up from 0.2410% in the previous auction in June and the highest level since January 2016. In the government bond auction, financial institutions respond to bids and successfully bid in order of lowest yield (highest price). For the first time since March 2021, when the BOJ explicitly set the upper limit for the yield on 10-year bonds at "about 0.25%," the upper limit and the bid yield matched.

In the background, there is pressure for interest rates to rise (and bond prices to fall). "Foreign sellers are still selling government bonds" and domestic and foreign brokerages, reveals. With inflationary pressures increasing around the world and Japan's inflation rate exceeding 2%, there is a tendency to question how much longer the BOJ can continue the current level of monetary easing. The 5th auction of 10-year bonds was a new issue every three months and was expected to trigger a new round of government bond selling.

The bid itself was, at first glance, a no-bid result. The bid-cover ratio, which is the amount of bids received divided by the amount of bids won, was in the five-fold range, a high level that has only been reached twice in the past ten years.

However, market participants rushed to bid for the bonds because they were trying to sell the successfully bid JGBs to the BOJ to earn a price margin. The 10-year bonds issued on 5th will be subject to a limit order operation in which the BOJ will purchase an unlimited number of bonds at 0.25% from 6th. If it can successfully bid at a yield slightly higher than 0.25%, it can profit simply by selling to the BOJ the next day. Although the bids were not actually successful, many bids were received with yields in excess of 0.25%.

The BOJ does not participate in the Treasury auctions to avoid direct underwriting of JGBs, but only buys JGBs in the market. Therefore, the BOJ's control is not as strong as in the secondary market. The results of the 5th auction reflect the reality of a situation in which the BOJ's ceiling will be "breached" in a bidding process in the near future.

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The English translations provided through this service are the result of automatic and mechanical translation of contents written in Japanese and created by Nikkei or licensed by a third party, by an automatic translation system provided by a third party after certain processing of the contents by Nikkei. Nikkei disclaims all warranties, express or implied, related to the English translations, including any warranty of accuracy, reliability, validity and fitness for a particular purpose. Users shall use this service with the full understanding that it employs an automatic translation system that automatically and mechanically recognizes and analyzes information and outputs the results.