Japanese bonds rally after fiscal concerns send super-long yields to records

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By Rocky Swift

TOKYO (Reuters) -Japanese government bonds recovered slightly on Friday, after a volatile week that saw fiscal and inflation concerns drive super-long yields to record highs.

Yields on 20-, 30-, and 40-year JGBs have been climbing, fuelled by worry over the country’s worsening fiscal health, as some political parties advocate consumption tax cuts to counter rising prices.

Yields move inversely to bond prices.

Data on Friday showed Japan’s core consumer inflation hit 3.5% in April, its fastest annual pace in more than two years, keeping pressure on the Bank of Japan to continue raising interest rates.

A weak auction of 20-year bonds on Tuesday underscored the market’s diminishing capacity to absorb new debt needed to finance the government’s fiscal deficit.

BOJ Governor Kazuo Ueda said on Thursday that the central bank will closely monitor market developments after the surge in yields on super-long debt.

“The risk of JGBs becoming ‘indigestible’ in the ultra-long term zone remains,” Mizuho analysts said in a research note on Friday. “The incentive to reduce issuance of super-long bonds (thereby shortening the duration) is relatively strong.”

The 30-year JGB yield fell 5 basis points to 3.115%, retreating from the all-time high of 3.185% hit on Wednesday. The 40-year JGB yield slid 7 basis points to 3.6%, down from the record 3.675% touched on Thursday.

The benchmark 10-year yield fell 1.5 basis point to 1.545%. Two and five year yields also declined.

The recovery in JGBs on Friday followed a similar rally in U.S. Treasuries, but concerns about demand for long-dated debt remain, said Resona Holdings chief strategist Shinsuke Kajita.

“We can’t rest easy yet as auctions for 40-year bonds and other securities are scheduled for next week in Japan,” he said.

(Reporting by Rocky Swift; Editing by Mrigank Dhaniwala and Sherry Jacob-Phillips)