Investor demand for Japan’s two-year bonds rise after Bank of Japan policy

Japan’s two-year government bond auction drew solid demand on speculation the Bank of Japan isn’t rushing into the next interest rate increase.

The auction comes 24 hours after the Bank of Japan's first monetary policy decision under new Prime Minister Sanae Takaichi, who is seen as an advocate of relatively low rates. (AFP)

The bid-to-cover ratio, a measure of demand, was 4.35, compared with 2.81 at the last auction and a 12-month average of 3.7. The two-year yield, which is sensitive to monetary policy expectations, extended declines, falling 1.5 basis points on the day to 0.91%.

The auction comes 24 hours after the BOJ’s first policy decision on Thursday under the new prime minister, Sanae Takaichi, who’s seen as an advocate of relatively low rates. Governor Kazuo Ueda gave few hints about the next rate hike at a press conference afterward, saying that the central bank isn’t falling behind the curve in the fight against inflation.

“Buying sentiment was boosted by the BOJ meeting and Ueda’s press conference which were perceived as dovish,” said Miki Den, senior rates strategist at SMBC Nikko Securities Inc. “While the possibility of a rate hike in December remains, the prevailing view is that even if the BOJ hikes, it will maintain a cautious stance once the policy rate reaches 1%.”

In another sign of strong appetite at the auction, the gap between average and lowest-accepted prices, known as the tail, shrank to 0.002, the smallest since 2021, from 0.029 at the previous auction. MUFJ-MS bought almost half of the entire debt sale.

“With one company securing half the allocation, other investors who missed out will likely have to buy in the secondary market,” said Kazuhiko Sano, chief bond strategist at Tokai Tokyo Securities. “There may be some short-term ripple effects on the market.”

Two board members dissented against the BOJ decision, unchanged from the September meeting. Overnight index swaps show less than a 50% chance of a rate hike by year-end, and around an 85% chance by January.

Still, the yen weakened to its lowest level since February against the dollar on Thursday and Tokyo inflation data out today showed a faster pace, keeping pressure on the BOJ to raise rates sooner. US Treasury Secretary Scott Bessent also said this week that it’s critical that the Japanese government gives the BOJ plenty of space to conduct policy to anchor inflation expectations and avoid currency volatility.

“The market is expecting the BOJ to hike rates by January,” says Naoya Hasegawa, chief bond strategist at Okasan Securities. “Bonds are unlikely to surge significantly following this auction result.”