Yield Soars to 29-Year High Stimulating Buying Pressure - Strong Demand for Japan's 10-Year Government Bond Auction

On Tuesday, demand for the Japanese 10-year government bond auction was stronger than the 12-month average level, as the increase in yield stimulated buying behavior. The bid-to-cover ratio for this auction was 3.9, the highest since September last year, compared to 2.57 in the previous auction and an average of 3.23 over 12 months. Following the auction results, the benchmark yield slightly fell to 2.535%, the highest level since 1997. The strong auction results may help alleviate the pressure on Japanese government bond yields. Previously, the rejection by the US and Iran of each other's latest proposals to end the conflict weakened the possibility of resolving the conflict in the short term, leading to an increase in Japanese government bond yields along with oil prices. Japanese 10-year government bond yields surpassed 2.5%. "The background of this auction is interest rate adjustment. Considering the expectation of rate hikes, yields have reached the highest level in 29 years, which I think encouraged traders to actively participate in the auction," said Rinto Maruyama, senior forex and interest rate strategist at SMBC Nikko Securities. In the minutes of the Bank of Japan's meeting last month, it was hinted that there might be a rate hike in June, with several members noting they maintain a high vigilance against the risk of inflation and see the need to raise rates. In the forward trading market, traders expect a 76% chance of a rate hike by the Bank of Japan in June. This suggests that there may be limited room for further rise in yields, as expectations of policy tightening are already reflected in the market. In this Japanese 10-year bond auction, another sign of strong investor demand is the tail (the difference between the average price and the lowest accepted price) being 0.03, compared to 0.36 last month. Mark Cranfield, strategist at Bloomberg, said: "The strong demand seen in this Japanese 10-year government bond auction, with a bid-to-cover ratio reaching the highest level since September last year, may have limited impact on the Japanese government bond yield curve. The global bond market is under pressure from high oil prices, and Japan's slow progress in addressing domestic inflation concerns is not conducive to sustained support for Japanese government bonds, especially with the 30-year bond auction scheduled for Thursday." This auction coincides with the visit of US Treasury Secretary Scott Benett to Tokyo, attracting more attention to Japanese government bonds. In January this year, during Bennett's attendance at the World Economic Forum in Davos, Japanese government bonds experienced a sharp decline, affecting US government bonds as well. Sources revealed that during the forum, Bennett met with Japanese Finance Minister Saiko Katayama, and to Japanese officials, the meeting between the two was more of a reprimand than a routine meeting. Meanwhile, since April 30, the Japanese authorities have intervened in the yen exchange rate multiple times, boosting the yen, but the yen-to-dollar rate has weakened again. It was reported that from late April to early May, the Japanese authorities accumulated about 10 trillion yen (approximately $640 billion) in buying yen and selling dollars in an attempt to stem the depreciation of the yen. However, this action has sparked strong dissatisfaction from the US. Bennett has publicly criticized Japan's intervention in the exchange rate several times, explicitly advocating that Japan should stabilize the yen through rate hikes rather than intervention in the exchange rate. Analysts point out that ongoing fundamental pressures and tensions in the Middle East are the main reasons for the weakening of the yen. The depreciation of the yen is increasing inflation risks and putting pressure on sovereign debt. Katayama confirmed that their team is closely coordinating with Bennett on monetary policy, but she refused to disclose whether the two sides discussed the Bank of Japan's monetary policy during the meeting.