High yields boost buying interest, Japan's two-year government bond auction "passes steadily"

Title context: High yields boost buying interest, Japan's two-year government bond auction "passes steadily" Text: High yields attracted funds into the market, making the demand at Japan's two-year government bond auction on Wednesday stronger than the 12-month average. It is reported that the bid-to-cover ratio rose to 3.89 from 2.97 in the previous auction, compared with a 12-month average of 3.75. Another sign of strong demand was that the tail spreadthe gap between the average price and the lowest accepted pricenarrowed to 0.014, compared with 0.034 last month. After the auction results were released, the decline in Japanese government bond futures narrowed. Miki Den, senior rates strategist at SMBC Nikko Securities, said the auction achieved a solid result thanks to high yields. She added that the market is closely watching monetary policy in Japan and the United States, with the U.S. employment report due later this week as the core focus. Notably, earlier, Japan's latest round of 40-year government bond auctions also attracted the strongest demand since 2020. As a result, the two-year yield, which is sensitive to monetary policy expectations, fell 1.5 basis points on Wednesday to 1.945%. Earlier this week it had touched 1.975%, the highest level since 1995, while the 10-year yield also retreated from a 30-year high to around 3.08%. The auction came amid growing speculation that the Bank of Japan may raise interest rates again as early as next month. That follows the central bank's decision earlier this month to raise its benchmark rate to the highest level in 31 years. Kazuo Momma, former head of monetary policy at the Bank of Japan, also expressed this expectation in an interview. Strategist Mark Cranfield said: "Demand at today's two-year Japanese government bond auction was above the one-year average, and it did not repeat August's poor auction. This result will reassure Japan and the entire G-10 fixed-income market. Although yields have not yet broken through 2%, they are already attractive enough for investors to position along the short end of the curve. In addition, Mitsubishi UFJ Morgan Stanley Securities took down 22% of the bonds, which should help ensure active secondary market trading." Overnight index swaps show that the probability of a Bank of Japan rate hike in October is about 23%, while a 25 basis point hike by December is almost fully priced in. Meanwhile, Japanese and U.S. policymakers have stepped up verbal intervention since last week to prevent the yen from sliding further, which also helped support market sentiment.