JGB Yields Fall with U.S. Peers on Fed Pivot; Poor Auction Limits Decline

Yomiuri Shimbun file photo
The Bank of Japan building

TOKYO, Dec 14 (Reuters) – Japanese government bond (JGB) yields fell on Thursday tracking U.S. yields, after the Federal Reserve signaled an end to its tightening cycle and a start to rate cuts next year.

However, Japanese yields pared declines in the afternoon after an auction of 20-year JGBs saw poor demand.

The 10-year JGB yield JP10YTN=JBTC fell 3 basis points (bps) to 0.655% as of 0415 GMT, and was earlier down as low as 0.625%.

The 20-year yield JP20YTN=JBTC fell 1 bp to 1.415%, retracing an earlier decline to 1.35%, the lowest since Sept. 1.

U.S. 10-year yields US10YT=RR briefly sank as low as 3.968%, breaking below the psychological 4% mark for the first time since Aug. 10, after Fed Chair Jerome Powell said on Wednesday that the question of when it will be appropriate to cut rates is coming into view.

However, Japan’s sale of 975.2 billion yen ($6.89 billion) of 20-year JGBs saw the tail – a measure of demand calculated as the difference between the lowest and average bids – swell to 0.82 yen from 0.14 yen at last month’s auction.

The tail is unusually long, showing demand from real money investors was limited, said Naomi Muguruma, senior market economist, Mitsubishi UFJ Morgan Stanley Securities.

A sharp decline in 20-year bond yields made the bonds unattractive, particularly with volatility likely to stay high as U.S. and Japanese monetary policy pull investors in opposite directions, she said, with the Bank of Japan holding a two-day meeting from Monday.

Speculation is mounting that even if not next week, the BOJ might lift negative interest rate policy in the next couple of months.

Two-year JGB yields JP2YTN=JBTC edged down 0.5 bp to 0.040%, while five-year yields JP5YTN=JBTC dropped 2.5 bps to 0.240%.

The 30-year yield JP30YTN=JBTC fell 1.5 bps to 1.630%, after earlier sinking as low as 1.575%.