Japan's 10-Year Government Bonds Hit 29-Year High Yield Sparking Buying

This Tuesday, Japan's 10-year government bond auction turned in an impressive result. Against the backdrop of the benchmark yield hitting its highest level since 1997, market buying was significantly stimulated. The subscription multiple for this auction climbed to 3.9, far higher than the previous level of 2.57, setting a new high since September last year.

Core details show that the key indicator of demand, the "tail" - that is, the difference between the average price and the minimum accepted price, has narrowed from 0.36 last month to 0.03. This indicates that investors' willingness to enter the market remains highly concentrated even in the upward interest rate cycle. After the auction results were announced, the 10-year Japanese bond yield slightly fell back to around 2.535%.

For investors, the yield returning to above 2.5% means that the asset's attractiveness is being rebuilt. SMBC Nikko Securities analyst Rinto Maruyama pointed out that the highest interest rate level in 29 years has encouraged traders to actively participate. This has somewhat relieved the bond market selling pressure brought about by tensions in the Middle East and rising energy prices.

However, the sustained support for the bond market still faces challenges. As the US and Iran rejected the latest ceasefire proposal, the imported inflationary pressure brought about by high oil prices poses a difficult problem for Japanese authorities. Bloomberg strategist Mark Cranfield warned that, against the backdrop of global bond market pressure, the positive impact on the Japanese bond yield curve may be limited.

The focus now lies on the Bank of Japan's policy shift. The minutes of the April meeting showed that several members remained highly vigilant about the risks of rising inflation and implied that the benchmark interest rate might be increased in June. The current swap market has already reflected an interest rate hike probability of about 76%, which means that the expectation of policy tightening has basically been priced in by the market.

The external environment is also increasingly variable. US Treasury Secretary Bessent is currently visiting Tokyo, and his attitude towards Japan's exchange rate policy is crucial. Bessent previously confirmed the strong partnership between the US and Japan on social media. Japanese Finance Minister Katayama Satsuki then confirmed that the US and Japan are maintaining close coordination in dealing with "excessive volatility" in exchange rates.

Despite Bessent sending a rare "default intervention" signal that led to the US dollar falling nearly a hundred points against the yen in one day, fundamental pressure still exists. Investors need to focus on the upcoming 30-year government bond auction on Thursday, as well as whether Bessent will further pressure the Bank of Japan to accelerate the pace of interest rate hikes after his talks with Japanese Prime Minister Takushi Hayana.