TOKYO, Sept 25 (Reuters) - Short-dated Japanese government bond yields tumbled on Wednesday on expectations of further interest rate cuts by the Bank of Japan, while long-dated debt yields rose after soft 40-year JGB auction results, steepening the yield curve sharply.
The five-year JGB yield hit a record low of minus 0.400% on rising speculation the BOJ is likely to cut interest rates deeper into negative next month. It then cut some of those losses and was last at 0.385%, down 2.5 basis points on the day.
BOJ Governor Haruhiko Kuroda said on Tuesday that if the central bank were to ease monetary policy further, it would aim at pushing down short- and medium-term interest rates without flattening the yield curve too much.
“Judging from his comments it would be difficult not to expect a rate cut next time,” said Takafumi Yamawaki, head of Japan rates and forex research at JPMorgan Securities, referring to the BOJ’s next policy meeting on Oct. 30-31.
“Markets have now fully priced in rate cuts to minus 0.30%.”
Kuroda’s warning against excessive flattening in the yield curve dampened demand at Wednesday’s 40-year JGB auction. The bid-to-cover was 2.69, its lowest level since August 2015.
The 40-year yield last stood at 0.420%, up 2.5 basis points on the day.
The yield spread between five- and 40-year yields jumped to 81 basis points, the widest since March, earlier in the session. It had fallen to as low as low 47 basis points just a few weeks ago.
The key 10-year yield fell 1.5 basis points to minus 0.260% and the 20-year yield dropped half a basis point to 0.175%, while the 30-year yield rose 1 basis point to 0.355%.
Benchmark 10-year JGB futures rose 0.31 point to 155.34, its all-time closing high, with a trading volume of 27,874 lots.
“We expect the JGB curve to continue to show a bear-steepening bias toward the (BOJ’s) October monetary policy meeting,” said Shinji Ebihara, director of research at Barclays Securities. (Additional reporting by Hideyuki Sano; Editing by Subhranshu Sahu)