PREVIEW - 2-Year JGB Auction Due

The Japanese Ministry of Finance (MoF) will today sell Y2.6tn of 2-Year JGBs. The MoF last sold 2-year debt on 29 March 2024, the auction drew cover of 4.072x at an average yield of 0.187%, an average price of 100.024, a high yield of 0.192%, a low price of 100.015, with 26.2089% of bids allotted at the high yield.

• Last month's 2-year auction demonstrated strong demand metrics, with the cover ratio increasing to 4.07x from 3.62x prior and the tail shortening.
• Today's auction occurs with an outright yield that sits around its cyclical peak, the highest level since 2009, after the BoJ delivered its first interest-rate increase since 2007 last month.
• No policy adjustment is anticipated at the two-day meeting ending on Friday. However, a growing number of economists foresee the possibility of the BoJ implementing another rate hike in October, with many highlighting July as a potential earlier timeframe. The prospect of a weaker yen is cited among the factors that could accelerate this timeline.
• The yield curve is steeper than the March outing, with the 2/5 and 2/10 curves showing increases of 5 and 10bps respectively.
• It is also noteworthy that today's supply follows a 5-year offering earlier this month that showed solid demand metrics. Crucially, that offering marked the inaugural 5-year auction for the new fiscal year and represented the first unveiling of the 5-year supply since the BoJ removed its negative interest rate policy (NIRP).
• Accordingly, that outcome, along with April's solid 10-year auction, established an optimistic tone for a market that had experienced mounting pressure since mid-December, fueled by expectations of policy tightening from the BoJ.
• Against this backdrop, it will be intriguing to observe whether the current 2-year yield, will prove sufficient to generate demand in today's auction.
• Results are due at 0435 BST / 1235 JST.