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Wild Ride in Japan’s Bond Futures Points to Growing Auction Fear

Stephen Spratt

(Bloomberg) -- Japanese bond futures have had a wild week, with Wednesday alone seeing a trading range that has only been exceeded once in the past three years.

That’s set a few tongues wagging, with some laying the blame on a call for more fiscal stimulus by Bank of Japan Governor Haruhiko Kuroda. But traders suggest this week’s challenging bond sale has been the key driver.

The 93-tick range move on Wednesday was the biggest since Oct. 1, when the futures swung 97 ticks. The two dates have something in common: 10-year bond sales.

Auction demand for the negative-yielding 10-year debt has been softening since April as the BOJ cuts back on purchases. Last month’s sale drew the lowest bid-to-cover ratio since Aug. 2016, while the tail -- the difference between the average and low prices -- was almost 15 times wider than the previous three auctions.

Primary dealers, who are obliged to bid at auctions in Japan, have taken to selling more futures as a hedge for the new bonds they have to buy. Wednesday’s sale happened just as futures slipped below the 200-day moving average, a key selling signal for some investors.

Sure enough, the futures fell while the contracts’ underlying seven-year bond yields rose as much as eight basis points, the worst performer on the JGB curve.

The fact that the move was greater for bonds due in 10 years and less suggests traders weren’t reacting to the prospects of increased fiscal stimulus. Yield curves typically steepen when governments are seen selling more bonds to fund reflationary measures.

The curve has flattened this week in Japan, with the spread between the 10-year and the 30-year bonds narrowing by two basis points to 48.5 basis points. The difference touched the flattest in three months on Wednesday. The 10-year futures contract has tumbled 157 ticks this week, the most since the global financial crisis in 2008.

To contact the reporter on this story: Stephen Spratt in Hong Kong at sspratt3@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Nicholas Reynolds

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