TOKYO, Aug 7 - Although investors have reacted calmly to news of greater issuance of 20-year Japanese government bonds (JGBs), the moment of truth will come in November, when the increased supply actually hits the market, traders say. The yield curve steepened slightly, with the spread between 10- and 20-year JGBs widening by a slim one basis point, but the market sees the super-long bond as under slight selling pressure ahead of an auction on August 19, though not from the increase. Responding to investors' calls, the Ministry of Finance (MOF) said late on Wednesday it will issue 20-year JGBs per month from October, to the tune of 500 billion yen ($4.16 billion) monthly. It now auctions 800 billion yen of the bonds every two months. "The market reacted calmly as the details on the increase came at the closest level of the market's earlier consensus," said Makoto Yamashita, a strategist at UFJ Tsubasa Securities. "But the point is how the market will react when the volume actually increases at the 20-year bond auction in November. It's more likely to see the curve steepen as the market will face more supply," Yamashita said. The MOF will offer only 500 billion yen of 20-year bonds in October, less than usual, but the market will have to digest more of them from November. In addition, November will see an auction of 400 billion yen in super-long 30-year bonds, which will add to market wariness. Yamashita said, however, considering the 10-year bond yield is below 1.0 percent, the spread between the 10- and 20-year bonds on a compound yield basis is so far at a fair value of slightly below 50 basis points, even after the MOF announcement. By Thursday afternoon on the yield on the key 62nd 20-year bond was up 0.5 basis point at 1.480 percent. The 252nd 10-year bond's yield fell 0.5 point to 0.905 percent.
SUFFICIENT DEMAND?
The ministry said it decided to raise the 20-year issue due to perceived strong demand from investors. "Faced with the likelihood of growing issuance of JGBs, we felt the need for an increase in liquidity (of 20-year bonds)," a senior MOF official told reporters on Wednesday. Total issuance of 20-year JGBs for the fiscal year to next March will rise by 600 billion yen, it said. The ministry will cut monthly issuance of two-year JGBs by 100 billion yen from the current total of 1.8 trillion yen. The MOF official said the ministry needed more time to decide on a possible increase in 30-year bonds. With the 20-year bond yield currently at around 1.5 percent, Japanese life insurers are expected to show a strong appetite considering that guaranteed yields for new policy holders of many of the insurers stand around 1.3-1.4 percent. But there are concerns that banks, who have played a key role in 20-year bond auctions this year, could take a careful stance as they are now more mindful of duration risks, having been bruised in the mid-June sell-off. The market experienced strong turbulence for the first time since 1998 when the key 10-year yield surged to a one-year high of 1.4 percent on July 4 after hitting a record high of 0.43 percent in mid-June. "There'll always be concerns of undersubscription if 20-year bond auctions take place frequently -- like every month -- when you can't count on bids from banks, especially after the mid-June sell-off," said a strategist at an asset management firm. "The idea of increasing the volume came up when demand from banks was strong before June," the strategist said. Others said, however, that 20-year paper has been digested by the market in the past when banks were not very active. But major involvement by banks in the sector presents more danger of market gyrations, considering that banks usually use 20-year bonds as a dealing instrument, they said. "I think we can get a better idea of real demand for the 20-year bonds without major involvement of banks," said Susumu Kato, chief fixed-income strategist at Lehman Brothers Japan. "With the yield level at 1.5 percent, we can tell there will be stable demand from end-users, making it much easier to forecast," Kato said.