Japan to consider buying back some super-long government bonds, sources say

TOKYO – Japan is considering buying back some super-long government bonds issued in the past at low interest rates, two sources with direct knowledge of the plan said on Monday, underscoring its focus on reining in any abrupt rises in bond yields.

The move would come on top of an expected government plan to trim issuance of super-long bonds — such as those with 20-, 30- or 40-year maturities — in the wake of sharp rises in their yields.

Yields on super-long Japanese government bonds rose to record levels last month due to dwindling demand from traditional buyers such as life insurers, and global market jitters over steadily rising debt levels. The 30-year JGB yield reached as high as 3.185% on May 21.

In Japan, such bonds were also sold off as Prime Minister Shigeru Ishiba faced political pressure for tax cuts and higher spending ahead of an upper house poll in July, policies that could add to the country’s already huge public debt.

JGB yields fell after the report on possible buybacks on market relief the government might take action to address an over-supply of super-long bonds.

Of 172.3 trillion yen (USD 1.2 trillion) in scheduled sales of JGBs to the market in the current fiscal year through March, over 24 trillion yen would be in super-long bonds, with maturities of 20- to 40-years.

The Ministry of Finance, which oversees the government’s debt issuance, will reach a final decision on buybacks after holding meetings with bond market participants on June 20 and June 23, the sources said.

Buying back super-long JGBs would require budget approval and will likely take time, they said.

“Reducing new issuance of super-long JGBs alone probably won’t fix the problem of over-supply, so this would be a move in the right direction,” said Mari Iwashita, executive rates strategist at Nomura Securities.

The yield on Japan’s benchmark 10-year government note flipped after the report from an earlier rise to be down 0.5 basis points at 1.45% as of 0836 GMT. The 30-year bond yield trimmed an advance of as much as 4.5 bps to be up 1.5 bps at 2.89%.

The volatility in the JGB market has turned investors’ attention to whether the Ministry of Finance and Bank of Japan could take measures to tame rises in super-long yields.

Sources have told Reuters the BOJ will probably maintain its current bond-tapering programme running through March but consider slowing the pace of tapering from the next fiscal year. A final decision will be made at the BOJ’s next policy meeting on June 16-17, the sources said.

BOJ Governor Kazuo Ueda has said the central bank will be vigilant to the risk large swings in super-long bond yields could affect shorter-term borrowing costs and have a bigger impact on the economy.

Yields on government bonds with the longest maturities have risen sharply not just in Japan but also in the United States, where a credit downgrade from Moody’s and President Donald Trump’s tax-cut bill have helped cause investors to demand better returns on their bond holdings.

(USD 1 = 144.0300 yen)

(Reporting by Takaya Yamaguchi; additional reporting by Kevin Buckland and Makiko Yamazaki; Writing by Leika Kihara; Editing by David Goodman and Toby Chopra)