(March 31): Japan’s two-year government bond auction passed smoothly as the high yield lured investors despite caution over a potential near-term rate hike by the Bank of Japan.
The bid-to-cover ratio at Tuesday’s sale was 3.54 compared with 3.32 at the last auction and a 12-month average of 3.59. Japan’s bonds held onto gains after the sale.
The two-year rate, which is more sensitive to monetary policy expectations, climbed to its highest level since 1995 last week. The BOJ kept the possibility of an April interest rate hike on the table after leaving policy unchanged at its latest meeting. Overnight index swaps show about a 68% chance of a move next month.
“The appeal of higher yields outweighed negative factors such as rising oil prices and inflation concerns, allowing the auction to pass smoothly,” said Miki Den, a senior rates strategist at SMBC Nikko Securities.
Japan is among the most vulnerable major economies to the fallout of the Middle East tensions, with more than 90% of oil imports coming from the region. The nation’s government bonds are grappling with concerns about inflation and economic growth as oil prices have soared since the Iran war broke out.
See also: Japan March duty-free sales rebound as China driven slump eases
Investors are speculating that the BOJ may also need to raise rates soon to help curb the yen’s weakness after the currency hit its lowest level since July 2024 against the dollar. Governor Kazuo Ueda said this week that currency movements are a factor with a big impact on the economy and prices.
The BOJ’s policy board presented a hawkish posture in a summary of opinions aired during their meeting earlier this month, with one member hinting at the possibility of having to respond to the Middle East conflict with a bigger rate hike than those recently undertaken.
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