Japanese 2-Year Bond Auction Sells at Record High, Yields Approach 2008 Levels Attracting Funds
Zhitong Caijing APP has learned that Japan's two-year bond auction on Tuesday generated significant market attention. This time, the auction achieved its highest demand level since last October, with short-term debt yields approaching levels seen during the global financial crisis in 2008, which has led to a surge in investor interest.
Data shows that this auction had an average bid-to-cover ratio of 4.47 times, exceeding both the previous month's 3.90 times and the average level over the past 12 months at 3.99 times. Another indicator of demand intensity is the tail price difference (i.e., the difference between the winning price and the lowest accepted price), which narrowed to 0.005, a significant improvement from the previous auction's 0.012.
The secondary market responded promptly, with two-year bond prices rising sharply and yields dropping slightly by two basis points to 0.82%. Although this yield retrenchment was limited in scope, it forms a contrast with the overall upward trend in short-term and long-term debt yields recently.
It is worth noting that this auction took place just ahead of the Japanese central bank's policy meeting, which is expected to maintain its benchmark interest rate at 0.5% on Wednesday and Thursday, according to informed sources. The central bank officials are reportedly considering the possibility of another rate hike this year.
Resona Asset Management Company's chief fund manager, Fujihara Takashi, noted that the results of this bond auction reflect the market's pricing for Japanese central bank rate hike expectations. The current yield level reflects both policy tightening expectations and provides a reasonable return space for holding these bonds. However, he emphasized that strong demand may not reverse the overall upward trend in yields.
The market price shows that the "risk-neutral yield" used to measure future short-term interest rate expectations has risen to 0.7%, a four-month high. This development is consistent with overnight index swaps, which reflect market expectations of Japanese central bank rate hikes by year-end. Prior to this, the Japan-US trade agreement became a key catalyst factor, controlling tariff levels below market concerns at around 15%. This has reduced the uncertainty surrounding the Japanese central bank's decision-making process.
There are currently two major areas of concern: one is the Japanese central bank's balance between inflation control and economic growth; the other is the impact of political dynamics on fiscal policy. After losing a majority in the House of Representatives, Prime Minister Ishiba Shigeru's tenure is facing scrutiny.
The market worries that if the government shifts towards a more accommodative fiscal policy (such as increasing spending or reducing taxes), it may exacerbate long-term debt supply pressure and push up long-term bond yields. However, Ishiba has consistently been known for his strict financial discipline, which is viewed as relatively friendly to the bond market.
In summary, this two-year bond auction result both verifies market expectations of monetary policy normalization and reflects investors' demand for short-term interest rate allocation within a rising yield cycle. Although political uncertainty remains, the implementation of the trade agreement and the gradual clarification of central bank rate hike expectations are driving the Japanese bond market into a new pricing stage.