(Bloomberg) — Global bonds rallied, with US Treasuries leading gains, on signs that Japanese authorities may adjust debt sales following a rout in the market.
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Long-dated debt led the move, with the 30-year US yield falling as much as nine basis points to 4.95% as the market reopened after a holiday. In Japan, similar yields fell more than 20 basis points. European bonds also rallied.
Japanese authorities signaled they are considering adjusting their debt plan after a selloff that drove the nation’s long-term borrowing costs to the highest levels in decades. Worries about the ability of governments to cover massive budget deficits weighed on developed-market debt in recent days, pushing long-dated US yields toward levels last seen in 2007.
“That potential lower issuance is giving Treasuries a nice helping hand,” said Michael Brown, strategist at Pepperstone Group in London. “For those seeking to buy long-term debt, lower Japanese government bond supply could force them into the Treasury complex.”
Japan’s finance ministry sent a questionnaire to market participants on Monday evening asking for their views on issuance and the current market situation, Bloomberg reported. It was an unusual move and traders took it as a sign that authorities are seeking to stabilize rout in long-dated bonds.
Some other governments have already shifted issuance toward shorter-dated tenors. The UK has been steering away from longer bonds given falling investor demand, a strategy that was reinforced by Jessica Pulay, head of the debt management office, in an interview published with the Financial Times on Tuesday.
The yield on 30-year UK gilts fell as much as nine basis points on Tuesday as local markets were also shut on Monday. Similar-dated German rates dropped seven basis points to below 3% before the moves eased.
Temporary relief
The chance that Japan’s government will reduce its bond supply goes at least some way to addressing the worries over demand. But it doesn’t address wider concerns about government finances globally, raising the possibility that Tuesday’s bond rally is only a brief pause in the tumult.
Japan’s bond market has also been squeezed by signs that the central bank may attempt to taper its huge holdings of government bonds further.
“Long-end yields are experiencing some relief, but we think US yields will find it particularly difficult to shake off a bearish taint over the coming weeks and months,” said Benjamin Schroeder, senior rates strategist at ING. “The fiscal trajectory still matters.”
US Treasuries have been in the spotlight since Moody’s Ratings stripped the government of its last top credit rating based on fiscal trends. The rout was compounded by the US House of Representatives last week passing President Donald Trump’s signature tax bill, which will increase the federal debt limit by $4 trillion.
A measure of how jittery investors are about Washington’s plans to raise the scale of future borrowing, the 10-year US term premium, is trading near the highest level since 2014.
US bond investors are now looking ahead to auctions of two-, five- and seven-year debt this week, as well as the release of the Federal Reserve meeting minutes, economic growth and inflation data.
The decline in yields pushing the US 30-year yield back below 5% is “psychologically important,” said Kathleen Brooks, research director at XTB. “Risk sentiment is given a boost.”
–With assistance from James Hirai.
(Adds comments, context and updates prices throughout.)
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