As interest rate hike expectations heat up, Japan's two-year government bond auction attracts attention

According to Zhitong Finance APP, as investors' expectations for interest rate hikes by the Bank of Japan heat up, the two-year government bond auction held in Japan on Thursday has attracted significant market attention. The market expects demand for this auction to remain robust. Data shows that the yield on two-year Japanese government bonds is approximately 0.87%, just a few basis points lower than the highest level since 2008; the yield on five-year Japanese government bonds is about 1.16%, also close to levels seen 17 years ago.

The rising expectations for interest rate hikes by the Bank of Japan are driven by the resilience of Japan's economic growth and persistent inflation. Data released last Friday showed that Japan's core CPI rose 3.1% year-on-year in July, exceeding the market expectation of 3% and far surpassing the Bank of Japan's target of 2%. The swap market indicates a 70% probability that the Bank of Japan will raise interest rates again before the end of the year. Additionally, U.S. Treasury Secretary Janet Yellen has stated that the Bank of Japan is "behind the curve" on interest rate hikes.

At the Federal Reserve's annual Jackson Hole symposium, Bank of Japan Governor Kazuo Ueda stated that Japan's tight labor market may continue to drive wage increases. This has further fueled speculation that the Bank of Japan may take action as early as the monetary policy meeting in October. The market currently estimates the probability of an interest rate hike by the Bank of Japan in October to be around 53%.

Omar Slim, co-head of Asian fixed income at PineBridge Investments, stated, "I believe the short end and even the mid-curve will be more stable, while the long end remains troubled by fiscal concerns." "There is increasing evidence of domestic inflation in Japan, and I believe Ueda is eager to take action. I expect the Bank of Japan to implement a 25 basis point rate hike before the end of the year."

Bloomberg strategist Mark Cranfield pointed out, "Japanese bond traders may remain on the sidelines ahead of today's two-year government bond auction demand data. Generally, two-year bond auctions do not cause a stir, but in the current highly sensitive environment of the long-term Japanese government bond market, each bond issuance brings additional risks to the yield curve."

The yields on Japan's ultra-long-term government bonds are also rising, as the Bank of Japan gradually reduces its large-scale bond purchase program. In addition to concerns about rising inflation, the market's expectations for the Japanese government to introduce new fiscal stimulus measures following the ruling coalition's defeat in the House of Councillors election in July have also raised concerns about an increase in the scale of Japanese government bond issuance