[MARKET ANALYSIS] Japanese yields soar on higher energy prices and reports of a supplementary budget

JGBs are a touch lower this morning, extending on recent downside. This comes after: a) a weak 5yr JGB auction, b) reports that the Japanese government is to start compiling a supplementary budget, c) lack of Iran progress, and d) surging energy prices. Factors which have led the 10yr to soar to soar to the highest in over 29 years, last at 2.79%. Notably, long-end rates (30yr) have jumped beyond the 4.00% mark, last at 4.20%.
Sticking to domestic factors, the 5yr auction was a little soft, garnering a b/c of 3.22x (prev. 3.58x), despite the average yield topping the 2% mark for the first time in decades – signalling that investors are rushing to purchase Japanese paper, despite elevated yields.
Elsewhere, and more pertinently for the fixed income environment, PM Takaichi announced that she told her Finance Minister Katayama to begin compiling a supplementary budget, to help ease the blow from rising energy prices – the PM had previously discounted the use of an additional budget. Katayama has suggested that she cannot provide specifics at this stage. Overall, a supplementary budget has been a growing risk amongst JGB traders over the past few weeks, and the confirmation today has only exacerbated woes. Minami of Norinchukin Research Institute suggested that "if the rise in yields starts to hit domestic stock prices and heightens the chance of a triple selling, that could increase criticism over ... policy”, adding that therefore officials will “likely pay heed to market pressures in compiling the extra budget”.
There is currently no size touted for the supplementary budget, though opposition proposals suggest a benchmark of around JPY 3tln. A Reuters source piece suggested that the budget will include funding from fresh debt sales. Inadome, a senior strategist at Sumitomo, said markets are beginning to price in the chance of an extra budget worth in the range of JPY 5-10tln.