20y JGB auction preview

Research evidence excerpt

20y JGB auction preview

Barclays | Japan Rates Strategy

roughly two years' time, implying that the sector currently appears even more undervalued1 . At

this pace of superlong JGB purchases, pension funds would accumulate approximately JPY7tn

over a two-year period. In the report cited above, we estimated that even a modest future

increase in the allocation to JGBs (for example, domestic bonds: from 25% to 30%) would result

in additional JGB investment of around JPY15tn. The purchase pace assumed in this scenario

would therefore correspond to roughly half of that projected increase in JGB investment.

However, it is important to note that considerable uncertainty remains over whether such a

pension fund shift back toward JGBs will actually materialize. In addition, the decline in yields

on 10 July may have already priced in these expectations.

Meanwhile, developments surrounding the Basic Policy could generate additional upward

pressure on yields depending on future headlines, potentially contributing to a weak auction

result. Figure 7 compares the 20y term premium with fair-value estimates under various

scenarios for annual government spending associated with the JPY370tn public-private

investment program (for calculation details, see Concerns over fiscal policy and a behind-the-

curve BoJ intensify with the Basic Policy 2 July). At present, market pricing appears broadly

consistent with the midpoint of the projected yield impact under a scenario of annual

government spending of JPY5tn, suggesting that fiscal concerns have already been priced to

some extent. However, as details of the Basic Policy become clearer, additional upward

pressure on yields cannot be ruled out. Potential drivers include conclusions reached by the