JGBS AUCTION: Mixed Demand Metrics For 20Y Auction

Earlier headlines crossed from Japan's FinMin Kato that the country is seeking more JGB holdings by domestic investors. This comes after recent increased scrutiny of Japan's fiscal position, with poor auction results for longer dated securities driving higher back end yields. Speculation is the BOJ may shift its taper plans, while Japan's MOF may change the mix of its bond issuance, i.e. focus more on short dated rather than longer dated issuance. 

• The broader implications of greater domestic participation in JGBs may mean less outbound investment to overseas bonds (and potential equities). This could have implications for offshore debt markets.
• The chart below plots cumulative outbound investment flows into overseas bonds and equities since 2000. Investments into offshore bonds dominates, although outflow trends to both bonds and equities have flatlined in recent years.
• In this sense, Japan has become a less important marginal buyer of overseas bonds/equities in recent years, at least compared to the period prior to 2020. Still, its stock of holdings remains very large.  

 Fig 1: Japan Cumulative Outbound Portfolio Flows (JPY Billions) 

Source: Bloomberg Finance L.P./MNI 

• If we see disinvestment of offshore portfolio holdings, particularly in the bond space, what country's/regions might be impacted? The second chart below looks at cumulative flows back to the start of 2005, with North America very dominate (i.e. the US) in recent years.
• This is followed by the EU, although cumulate inflows peaked back in early 2021. Cumulative flows to Germany have been trending lower over the past decade, and are now comfortably negative. France and Italy have been relatively steady, while France has been losing ground in recent years (but still represents the largest stock. Still, this is still modest compared to the cumulative flows that have been seen to the US.
• There are obviously lots of factors in play in terms local investors asset allocation decisions, but these flows/stocks are worth being mindful of if local investors are called upon to support the home bond market. 

Fig 2: Japan Cumulative Outbound Flows To Long-Term Debt Securities (JPY, Billions)  

Source: Bloomberg Finance L.P./MNI

NAB business price/cost components in May were mixed containing elements of concern and optimism. The pickup in labour costs in addition to signs that wage growth is rising again are likely to be monitored closely. The employment component of the survey though was very weak which may pressure pay gains.

• Purchase costs rose 1.1% 3m/3m and the price of final products were up only 0.5%, both the slowest since January 2021. Retail prices rose 1.2% 3m/3m, unchanged from April and the fastest since October.

Australia NAB business prices/costs 3m/3m %

• However, labour costs rose 1.7% 3m/3m from 1.5% in April, highest since January and signalling that wage growth may have risen further in Q2 after both the annual rise in WPI and compensation per employee increased in Q1 with April SEEK advertised salary growth steady.
• Businesses in certain sectors noted to the RBA that it was difficult to pass higher costs onto customers. 

Australia labour costs 3m/3m %

At the Tokyo lunch break, JGB futures are slightly weaker, -4 compared to the settlement levels, after giving up overnight gains.

• BoJ Governor Ueda has been before parliament, answering questions from lawmakers. The Governor inoted limited policy space on the downside, given the current 0.50% policy rate. This is if fresh stimulus is needed. The real rate is being kept sub 0% to stimulate the economy further, as Ueda states that Japan is still some distance from the 2% inflation objective. Ueda reiterated that they will raise rates if they have confidence in achieving the 2% target.
• US equity futures have broken to fresh multi-month highs in the first part of Tuesday trade, with Nasdaq futures slightly outperforming. We can't see any direct fresh catalysts for the move.
• Cash US tsys are 1-2bps cheaper, with a slight flattening bias, in today's Asia-Pac session after yesterday's modest rally.
• Cash JGBs have twist-flattened across benchmarks, with 5-7-year yields 1bp higher and the 30-40-year yields 2bps lower. The benchmark 10-year yield is 0.3bp higher at 1.471% versus the cycle high of 1.596%.
• Swap rates are flat to 2bps higher, with the curve steeper. Swap spreads are mixed.