Demand for Japan's two-year government bond auction hits lowest level since 2016 as rate hike expectations continue to rise

1. Demand for Japan's two-year government bond auction held on Friday was weak, with a bid-to-cover ratio of only 2.97, lower than the previous 3.63 and well below the 12-month average of 3.74. The tail, an indicator measuring investor interest, was 0.034, far higher than last month's 0.007, marking the weakest level since 2016, reflecting strong market expectations that the Bank of Japan will raise interest rates soon. 2. As investors increase their bets that the Bank of Japan will raise rates again soon, Japanese government bond yields have surged significantly. According to reports, the government led by Prime Minister Sanae Takaichi supports a rate hike as early as September to address the continued weakness of the yen. Overnight index swaps indicate there is about an 84% probability of a Bank of Japan rate hike in September, with the market having fully priced in a rate hike in October.