Japan’s auction of two-year government bonds on Thursday will be in focus as investors see an increasing chance of a near-term interest rate hike by the central bank.
Demand for securities in the sale is expected to be firm, with two-year yields around 0.87% and just a few basis points below the highest since 2008. The five-year yield is around 1.16%, also near levels last seen 17 years ago.
The moves come on the back of data showing Japan’s resilient economic growth and sticky inflation. Swap markets show a 70% chance of Bank of Japan Governor Kazuo Ueda delivering another rate hike by the year-end. US Treasury Secretary Scott Bessent has said the BOJ is “behind the curve” in raising interest rates.
At the Federal Reserve’s annual symposium at Jackson Hole, Ueda said Japan’s tight labor market is likely to keep upward pressure on wages, adding fuel to speculation of a policy move possibly as soon as the October monetary policy meeting. Overnight index swaps are now pricing in a roughly 53% chance of a hike that month.
“I think the short end, all the way to the belly of the curve, would be much better anchored” compared to the long end, which is still mired in fiscal concerns, said Omar Slim, co-head of Asia fixed income at PineBridge Investments. “There is increasing evidence that we see homegrown inflation, and I think Ueda is itching to act. I expect a 25 basis-point hike before year-end.”
What Bloomberg strategists say:
Japanese bond traders are set to be in a state of suspended animation ahead of the breakdown of demand from today’s two-year auction. Typically it is a duration which passes off without drama, but in this febrile environment for long-term JGBs, every debt sale takes on additional risk for the yield curve.
— Mark Cranfield, Markets Live Strategist. Read more on MLIV.
Yields on super-long bonds in Japan have also been moving higher, buoyed by the central bank’s gradual tapering of its massive bond purchases, and concerns about Japan’s wide fiscal deficit and rising inflation.
Results of Thursday’s two-year auction are due at 12:35 p.m. Tokyo time. Traders will focus on the bid-to-cover ratio — a key measure of demand — which rose to 4.47 at the last two-year sale, above the 12-month average.
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