PREVIEW - 2-Year JGB Auction Due

The Japanese Ministry of Finance (MOF) will today sell Y2.9tn of 2-Year JGBs, re-opening JB#450. The MOF last sold 2-year debt on 30 June 2023, the auction drew cover of 4.263x at an average yield of -0.062%, an average price of 100.135, a high yield of -0.060%, a low price of 100.130, with 32.4884% of bids allotted at the high yield.

• Today’s supply comes after last month’s 2-year auction saw the highest cover ratio since September despite a richening in the outright yield. At the time, the receding possibility of a near-term BoJ policy adjustment appeared to support the bid.
• This time, the outright yield is higher, but uncertainty surrounding the BoJ policy outlook has increased.
• While we expect Governor Ueda to exhibit patience, there remains a small risk that, given the backdrop of increasing inflation expectations and robust wage growth, the Bank might find it unnecessary to wait until September to act. Certainly, there are market commentators advocating for policy action this month, driven by the evolving inflation dynamics in Japan. The country is experiencing upward pressure on prices across a wide spectrum of goods and services.
• It's important to consider that BoJ officials have acknowledged their reluctance to signal the timing of any policy changes in advance. Hence, if the BoJ were to surprise the market, we believe it could take one of two possible actions: either widen the trading band around the 10-year target of 0% or shorten the tenor of the YCC target to 2-5-year JGBs. While both scenarios are possible, we assign a higher probability to the latter.
• Nevertheless, the less negative yield on offer this time around should ensure adequate demand.
• Results are due at 0435 BST/1235 JST.