Soft Demand in Bond Auction
Japan's recent 10-year government bond auction saw weaker-than-average demand, with a bid-to-cover ratio of 3.02—down from the previous 3.30 and the 12-month average of 3.24. The tail, or difference between the stop-out yield and the auction yield, remained at 0.05 basis points, unchanged from the previous month.
Election Outlook Weighs on Investor Sentiment
As Japan approaches its upcoming general election, investor caution is growing. Polls suggest the ruling coalition could secure around 300 of the 465 available seats, with the Liberal Democratic Party on track for a standalone majority. Such an outcome may pave the way for expanded fiscal stimulus, potentially increasing the government's debt burden.
Rate Hike Bets Gain Momentum
Last month, Japanese bond yields spiked to multi-year highs following reports that the prime minister was considering tax cuts. Although yields have since pulled back, the benchmark 10-year yield remains near 2.25%—the highest since 1999. Overnight index swaps now price in a 76% chance of a rate hike before April, with a 25-basis-point increase by June already fully priced in by markets.
Market Volatility Expected to Rise
With the election approaching and expectations for monetary tightening rising, traders are closely watching for further market movements. Analysts warn that Japanese bond markets could face increased volatility in the coming months, particularly once policy direction becomes clearer.