Japanese bonds mixed after 10-year debt auction finds frantic takers; 20-year yield hits record low

The Japanese government bonds traded mixed on Tuesday after a solid 10-year auction, while strength in the super long zone shaved the 20-year yield down to a record low. Also, bond prices are expected to trade in a range bound due to thin trading activity during a relatively quiet session that saw little data of much significance.

The yield on the benchmark 10-year bonds, which moves inversely to its price hovered around -0.242 percent, short-term 2-year JGB yield rose ½ basis point to -0.318 percent, JGB 5-year yield jumped more than 1 basis point to record low of -0.332 percent, super-long 40-year bonds slid more than 1 basis point to 0.097 percent, the yield on 30-year JGB tumbled nearly 2 basis points to 0.069 percent and the yield on 20-year JGB fell nearly 1 basis points to 0.030 percent by 06:40 GMT.

In terms of data, Japanese Nikkei services PMI fell to 49.4 in June, as compared to 50.4 in May, while June composite PMI also declined to 49.0, from 49.2 in May.

On Monday, the Bank of Japan Tankan survey firms' one-year inflation forecast fell to +0.7 percent in June, as compared to +0.8 percent in the first quarter of 2016. This is the 4th consecutive quarterly downward revision in expectations from firms.

Moreover, Asahi press conducted a poll ahead of the coming upper house election and they showed that 55 percent said Prime Minister Shinzō Abe should rethink his economic policies and 28 percent said not. On 10 July Japanese voters will go to the polls in the triennial upper house election. The candidates will be all-too-familiar faces; the party leaders wooden; and policy menus unpalatable. The contest is for only half the seats and voters are expected to either vote for the political status quo or not vote at all.

The outcome of the election will have little effect on the Abe government’s ability to pass the legislation. The ruling coalition of the Liberal Democratic Party (LDP) and Komeito holds a two-thirds majority in the lower house, with the ability to override the upper house. A great deal of attention has been paid both domestically and internationally to the chances of the ruling coalition securing 162 seats, and with that two-thirds majority in both houses the ability to amend the Constitution.

According to Reuters, the BoJ did not offer to buy JGBs under its massive JGB purchase program, as the MoF conducts a monthly 2.4 trillion 10-year auction. The BoJ is widely expected to buy the new 10s tomorrow under the program.

On Friday, Japan May consumer price index fell 0.4 percent y/y, against market consensus of -0.5 percent y/y, as compared to -0.3 percent in April. Also, national CPI excluding fresh food fell 0.4 percent, against investors’ expectations of -0.4 percent, from -0.3 percent in April. This spooked that the BOJ will ease further at its July meeting. The next BOJ two day meeting is scheduled to take place on July 28 and 29.

Moreover, the BOJ in its own calculation mentioned that May core CPI rose +0.8 percent y/y, as expected, but lower than the previous +0.9 percent.

Meanwhile, the benchmark Nikkei 225 index closed down +0.67 percent at 15,669.33, and the broader Topix index closed lower 0.42 percent to 1,256.64 points.