JGBs fall after weakest auction in 5 years spurs sell-off

By Junko Fujita

TOKYO, Aug 13 (Reuters) - Japanese government bonds dropped on Wednesday after a five-year bond auction drew the weakest demand in more than five years, triggering a wave of selling by investors.

The five-year yield JP5YTN=JBTC rose 3 basis points (bps) to 1.070%. The 10-year JGB yield JP10YTN=JBTC rose 2.5 bps to 1.525%.

Yields move inversely to bond prices.

The lacklustre auction followed a session in which the 10-year JGBs untraded all day, reflecting thin liquidity during Japan's "Obon" holiday season.

"The market was worried about the liquidity and hesitated to participate in the auction," said Katsutoshi Inadome, a senior strategist at Sumitomo Mitsui Trust Asset Management.

The auction received bids worth 2.96 times the amount sold, the lowest ratio since March 2020, and lower than a ratio of 3.54 times at the previous auction in July.

The level of the five-year bond yield was not high enough, so that the market was afraid to buy bonds in case the yield rises in the coming sessions, said Miki Den, a senior Japan rate strategist at SMBC Nikko Securities.

JGB yields have eased from their highs in July as expectations of a rate hike by the Bank of Japan receded, following the central bank's caution over persistent risks to the economic outlook.

The two-year JGB yield JP2YTN=JBTC rose 1.5 bps to 0.785%.

Yields on longer-dated bonds fell, with 20-year JGB yield JP20YTN=JBTC slipping 0.5 bp to 2.515%. The 30-year JGB yield JP30YTN=JBTC fell 0.5 bp to 3.085%.

The 40-year JGB yield JP40YTN=JBTC fell 1.5 basis points to 3.285%.