Great Graphic: Japanese 10-Year Yield Rises above German 10-Year Yield

For the first time, the German 10-year bund yield has fallen below the 10-year Japanese government bond yield.  This Great Graphic shows a long-term chart of the spread between the two and was created on Bloomberg.  

Ironically, in the low interest rate world, what has actually taken place is that the JGB yield has risen above the German yield.  The 10-year bund yield is up 2 bp to 33 bp today, while the 10-year JGB yield has risen almost 8 bp to nearly 36 bp. This is the largest yield rise in Japan since May 2013. 

The increase in JGB yields comes on the back of a poor bond auction in Japan.  The sale of JPY2.4 trillion JGBs saw weak reception (bid-cover of 2.68 vs 3.7 average over the last ten auctions. The tail (difference between low bid and average bid) exploded to 0.45 from 0.03.  The is the largest tail for a 10-year auction since 2003, according to Dow Jones data. 

Low yields and increased volatility have been cited behind the poor auction.  The 10-year yield has spiked from about 19 bp on January 19 to today's 36 bp.   

The Ministry of Finance will auction 30-year bonds on Thursday.  Given the backing up of the 30-year yield (+25 bp off the lows from January 19) Japanese desks are expecting a better reception that could help steady the entire curve.  

Although the BOJ is buying nearly all the new supply of Japanese government bonds, a cross current is the divestment by pension funds.  Another element of the diversification has been the stepped up purchases of foreign equities.  The weekly MOF data can be noisy, the week to January 16 saw a record buying of foreign stocks. The four-week average of JPY330 bln is the highest in six years. 

The ECB's sovereign bond buying program entails the purchases of roughly 100 bln euros of German bonds, including agencies, like KfW.  This is at the same time that Germany runs a balanced budget (no net new supply), will in fact, pay down some debt this year.  The implication is that there is a shortage of German paper and this will likely push the yield down over time.   Although the market has responded favorably to the latest Greek initiative, negotiations are still in the early days, and with elections in Portugal and Spain this year, the political uncertainty will persist.