Japan’s Super-Long Yield Gap Near Biggest in Two Decades on BOJ

Hidenori Yamanaka
3 min read
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(Bloomberg) -- Yields on Japan’s longest-maturity government bonds relative to shorter debt have climbed to near two-decade highs as investors position for the central bank to delay further interest-rate hikes.

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Speculation that the Bank of Japan would stand pat on policy for the rest of the year has boosted demand for bonds, but the nation’s super-long debt maturing in 30 years and 40 years have been weighed down by supply concerns. Investors are instead eyeing 20-year bonds, which are less sensitive to interest rate moves than longer debt but at the same time offer greater returns than the short end of the curve.

All that’s caused yields on 30-year bonds to exceed 20-year rates by 41.5 basis points last week, within 2 basis points of matching the widest gap since 2002 reached on Aug. 7, Bloomberg-compiled data show. The 40-year bond spreads over 20 year bonds have also widened to near record levels since the ministry began issuing 40-year debt in 2007.

The yield moves underscore how the first shift to raising rates in almost two decades has forced investors to become more vigilant about the higher risks of sharp bond price swings. Global investors are also watching whether rising interest rates at home encourage Japanese market players to bring back some of their $4.4 trillion invested abroad — moves in Japan’s super-long rates suggest that picking investments may not always be straightforward.

If the BOJ doesn’t raise interest rates again soon, investors will move to buy bonds offering high interest rates, said Tadashi Matsukawa, head of PineBridge Investments’ fixed income management department. Japan’s 10-year yield was 0.93% on Tuesday while the 20-year’s was 1.725%.

With new Prime Minister Shigeru Ishiba saying last week that conditions aren’t ripe for an additional rate hike, the BOJ isn’t expected to take such action in the immediate future. In that environment, investors are looking to profit from the combination of coupon payments, or carry, and price gains as debt moves toward its maturity down the yield curve, known as roll-down.

Bond Returns

For bonds maturing in about 20 years, the combined return from carry and roll-down is about 7.6 basis points by holding on to the debt for six months, higher than 6 basis points for bonds due in 30 years, according to Bloomberg calculations. Ten-year notes fetch more, offering over 8 basis points, but they face risks stemming from the BOJ’s planned reduction of purchases of those bonds.

Meanwhile, there’s concern that demand for 30-year and 40-year bonds may falter due to decreased buying by life insurers, one of their main investors: the insurers had been boosting their holdings of the debt to comply with the new capital adequacy regulations, but those transactions appear to have run their course.

If the gap with 20-year bonds stay wide, there’s also the possibility that Japan’s finance ministry will reduce issuance of 30-year and 40-year bonds next fiscal year starting April 2025. That would be positive for the longer bonds as supply decrease. The ministry cut the issuance amount of 20-year bonds by 200 billion yen ($1.4 billion) per monthly auction this fiscal year as part of its efforts to decrease the government’s debt, but there was no change for the longer debt.

“Volatility in the bond market is low unlike other markets” so it’s easy to get into positions to benefit from carry and roll-down, said Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management. He doesn’t see too much scope for yields to rise, with 20-year bond yields likely to peak at about 1.8% for with benchmark 10-year rates below 1%.

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