Japan’s two-year government bond auction on Thursday drew the strongest demand since August 2024, supported by higher yields and expectations that the Bank of Japan may not rush into further interest rate hikes.
Bond futures and two-year notes pared earlier losses after the result showed the bid-to-cover ratio jumped to 5.24 compared with 3.54 at the previous sale. The narrower gap between the average and lowest-accepted prices also added to evidence of robust investor interest.
Oil surged to a wartime high after a report that US President Donald Trump is eyeing new military options for action in Iran. That’s complicating the BOJ’s policy outlook, stoking inflation while clouding growth. That uncertainty has made policymakers more cautious, with Governor Kazuo Ueda signaling this week that more time is needed to assess the impact to decide on further rate hikes.
Demand was “driven by increased expectations of a postponement of interest rate hikes due to concerns about a resurgence of tensions between the US and Iran,” said Ryutaro Kimura, a senior fixed-income strategist at BNP Paribas Asset Management.
“Bond investors are shifting away from long and super-long bonds, which are vulnerable” to the risks of the BOJ falling behind the curve in rate hikes, toward shorter-maturity debt, Kimura said.
The bid-to-cover ratio at Thursday’s auction was markedly above the 12-month average of 3.6. The tail shortened to 0.005, compared with 0.012 last month.
What Bloomberg strategists say:
It is rare to see a bid-to-cover ratio above 5.0 for any Japanese bond auction, but that is the result at today’s 2-year auction, which also came in with a low price well above forecasts. The average yield at 1.407% has a thick cushion against the BOJ’s target rate.
Added to the strength of the debt sale, 42% was bought by one bank, which will provide for solid trading in the secondary market. Whatever volatility may arise at the longer end of the JGB curve amid high oil prices, this is a rock solid short-dated auction.
— Mark Cranfield, Markets Live Strategist. Read more on MLIV.
Still, upward pressure on policy-sensitive short-term rates remains. Japan’s central bank held rates unchanged at its April meeting but raised its inflation outlook, with three dissenting votes highlighting growing concern over upside price risks.
Meanwhile, the Federal Reserve also held policy steady, though four opposing voices underscored divisions over the outlook and helped drive US two-year yields higher.
Two-year JGB yields reached a three-decade high of 1.4% earlier in April. The tenor typically attracts a broad investor base, including banks and asset managers, supported by demand for collateral linked to BOJ operations and liquidity management.
This article was generated from an automated news agency feed without modifications to text.
