TOKYO—A well-bid auction of 10-year Japanese government bonds found strong demand among Japanese banks and institutional investors Tuesday, sending the benchmark yield to a fresh seven-year low.
That yield could fall further this week, possibly breaking 1%, as investors take the solid sale as a green light to buy bonds. The yen's strength, which hurts Japanese share prices, also could also support the market if it persists, analysts said.
The fall in yields is a welcome development for the government of Prime Minister Naoto Kan, which is trying to trim the country's massive public debt without derailing the economic recovery. Lower yields make that balancing act less difficult, by reducing the government's debt servicing costs.
The 10-year yield fell 0.015 percentage point to 1.030% late Tuesday, its lowest level since August 2003.
Japan's Finance Minister Yoshihiko Noda during the day hailed the fall in yields, calling it a "flight to quality" that reflects investors' confidence in the government securities.
The government sold 1.998 trillion yen ($23.10 billion) of the 10-year cash bond Tuesday, at a lowest price of 100.33 yielding 1.063%. The result was slightly stronger than expected. Dealers had expected a lowest price of 100.32.
The note is a reopening of July's issue, carrying its 1.1% coupon, the lowest in eight years. Such low yields would generally be expected to discourage investors seeking higher returns. But Japanese banks have excess cash due to low levels of lending. They are funneling those funds into the government bond market, as Tuesday's tender showed, analysts said.
"Even if the coupon in today's auction had been revised down to 1.0%, I don't think that would have mattered that much," as demand from Japanese investors remains strong, said RuiXue Xu, debt markets strategist at Royal Bank of Scotland.
