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Supply/demand in super-long sector seen influencing 10-year JGB yield
Long-term and super-long-term JGB yield scenario for May 26-30
Developments in the 10-year JGB yield this week are likely to hinge on supply/demand concerns in the super-long sector, with the 10-year yield falling if those concerns fade and moving higher if they pick up. In any case, we think yields in the 1.55% - 1.60% range would elicit a certain amount of dip-buying demand inasmuch as 1) expectations of BoJ rate hikes in 2025 have not changed significantly and 2) the supply/demand situation in the medium- and long-term sectors is relatively stable. That said, we still anticipate nervous trading for the 10-year yield since there are a number of upcoming events likely to have a bearing on JGB supply/demand and the fiscal situation. These include 1) a 40-year JGB auction on May 28, 2) the BoJ’s "interim review" of its plan for reducing bond purchases, along with a discussion of its bond-buying plans in FY26 and beyond, at the June 16-17 Monetary Policy Meeting, and 3) domestic political developments in June and July.
We anticipate weak results for the 40-year offering this week in view of market participants’ reduced risk tolerance. As for the interim review, the BoJ will probably have no choice but to continue patiently reducing its bond purchases. Specifically, we think it will keep trimming its purchases 1) with high visibility, 2) an eye on the ratio of its ongoing purchases to JGB issuance in each maturity, and 3) independently of monetary policy decisions. Revamping its plans in consideration of recent supply/demand dynamics could generate a substantial amount of "noise" and potentially prompt the market to force the central bank’s hand on the next round of revisions. If that continued, it would essentially represent the return of yield curve control, and QT would no longer be "like watching paint dry" (in the words of former Fed Chair Janet Yellen). Last week, Policy Board member Asahi Noguchi said regarding the recent increase in super-long bond yields that "the rise has been very sharp but cannot be assumed to be 'abnormal.' (...) I believe it would be inappropriate to engage in rash intervention or market manipulation."
As for monetary policy decisions, we need to keep an eye on the Ishiba cabinet’s public approval ratings and the moves made by opposition parties. The current session of the Diet will end just a month from now, on June 22. Prime Minister Shigeru Ishiba has declared to the Diet that he will ensure the price of rice drops to less than JPY4,000 for a 5kg sack, and there are suggestions that he could be forced to take responsibility and step down ahead of the Upper House election if he fails to deliver on that pledge (Jiji Press, May 21). We do not know whether the opposition parties will submit a no-confidence resolution at the end of this session or whether all of them would support such a resolution, but in any event, we anticipate an increasingly uncertain outlook for the domestic political situation.
The Ishiba cabinet is a proponent of fiscal discipline, but there is no indication that this stance has boosted its sinking public support ratings. Yet at the same time, voters do not appear to be seeking a consumption tax cut. In a poll conducted by the Yomiuri on May 16-18, 51% of respondents said they thought lowering the consumption tax would help stimulate the economy, vs. 41% who disagreed. When asked whether cash handouts would benefit the economy, an overwhelming 76% answered in the negative. We suspect the cabinet’s depressed approval ratings are a function of something other than fiscal policy. The main risk for the bond market is probably a scenario in which the Ishiba cabinet centers its election campaign on the consumption tax and loses, which could be seen as indicating voter approval for a consumption tax hike, even if there were other reasons for the coalition’s defeat ("victor writes the history").
