(Bloomberg) -- A rally in Japan’s bond market has spilled over to US Treasuries, as signs that Japanese authorities may look to re-establish stability after a tumultuous period fuel a spate of bond buying across global markets.
Yields on 10-year Treasuries fell by five basis points while those on 30-year bonds slid as much as eight basis points. The moves followed a plunge in long-term Japanese bond yields after the country’s finance ministry sent a questionnaire to market participants regarding appropriate issuance amounts. Japan’s 20-year yields dropped as much as 19.5 basis points to 2.31%, while 40-year yields declined 25 basis points.
Some traders took the questionnaire as a sign that Japanese authorities are seeking to restore calm in the world’s third-largest bond market, in part by cutting back bond supply in an attempt to cushion the blow of slowing demand.
“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 JGB supply could force them into the Treasury complex.”
The finance ministry sent the questionnaire after a sale of 20-year debt last week got the weakest demand in more than a decade, fueling a painful period of bond selling in the market that exacerbated a global rout.
Bond yields rose across developed markets last week as investors worried about the ability of governments to cover massive budget deficits, pushing 30-year Treasury yields toward levels last seen in 2007. 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.
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, raising the possibility that Tuesday’s bond rally is only a brief pause in the tumult.
“The shift in issuance strategy is seen as a response to rising pressure from bond vigilantes — investors who push back against unsustainable fiscal policies — underscoring how markets can influence government debt management,” said Shier Lee Lim, lead FX and macro strategist at Convera Singapore. “While short-term sentiment has improved, the increased reliance on shorter-dated issuance may lead to higher rollover risks over time.”
Yields on 30- and 40-year Japanese bonds dropped further on Tuesday, paring some of their rise from last week. Long-term government bonds yields in Australia, New Zealand and elsewhere also fell as investors reacted to the news.
(Updates throughout)