Weak auction demand, Japan's 2-year government bond yield rises to a new high since 2008
Japan's 2-year government bond yield has risen to its highest level since 2008, as the market anticipates that the Bank of Japan will raise interest rates in October. Auction demand has hit its lowest level since 2009, with the bid-to-cover ratio dropping to 2.81. Analysts point out that investors are adopting a cautious stance at the end of the quarter, leading to weak auction results. The market is focused on the Liberal Democratic Party presidential election on October 4 and its impact on interest rate hike expectations. A member of the Bank of Japan has indicated that the necessity to adjust the policy interest rate is increasing, intensifying market uncertainty regarding policy direction
Due to market expectations that the Bank of Japan will raise interest rates as early as October, demand for Japan's 2-year government bond auction has hit its lowest level since 2009. The key indicator measuring demand, the bid-to-cover ratio, fell to 2.81 from the last auction, significantly below the 12-month average of 3.79.
On September 30, Japan's 2-year government bonds continued to decline, with yields rising by 1 basis point to 0.945%, the highest level since 2008.
Miki Den, a senior interest rate strategist at Sumitomo Mitsui Trust Securities, stated:
"The weak auction results are due to the market's heightened expectations for the Bank of Japan to raise interest rates in October, coupled with investors' cautious stance at the end of the quarter."
Bloomberg strategist Mark Cranfield believes that today's 2-year Japanese government bond auction performed poorly again, indicating that traders expect the Bank of Japan to raise interest rates in October and are seeking higher yields to compensate for the risks. The yield on 2-year government bonds may need to rise further above 1% to stabilize the short-term yield curve.
The market is closely watching the ruling Liberal Democratic Party's presidential election on October 4, assessing its impact on expectations for the timing of the Bank of Japan's next interest rate hike. Overnight index swaps indicate a 67% probability of a rate hike.
Central Bank Policy Signals Strengthen Rate Hike Expectations
At the last meeting of the Bank of Japan, two members voted against the decision to maintain interest rates, boosting market speculation about an imminent rate hike. Bank of Japan member Asahi Noguchi stated in a speech on Monday that the necessity of adjusting the policy rate is increasing.
In the minutes of this month's meeting, the central bank left ample room for a rate hike in the near future but did not explicitly indicate that a hike would occur in October.
Political Factors Add Uncertainty to Monetary Policy
Last week, popular candidate Sanae Takaichi for the Liberal Democratic Party's presidential election attempted to distance herself from dovish remarks made a year ago, stating that the Bank of Japan should decide the details of its monetary policy independently. Another candidate, Shinjiro Koizumi, is seen as holding a more cautious fiscal stance while leaving the normalization of monetary policy to the central bank. These statements have heightened market uncertainty regarding the direction of policy.
The market is paying attention to speeches by the Bank of Japan's governor and deputy governor this week, as well as the Tankan survey data, in search of more clues about the monetary policy path. A 10-year government bond auction will be held on Thursday.
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