Japan’s latest 20-year government bond auction on Wednesday attracted the strongest demand in four years, as higher yields enticed investors even amid political turmoil, Bloomberg reported.
The auction drew a bid-to-cover ratio of 4.0, sharply above August’s 3.09 and the 12-month average of 3.2. The “tail,” or the spread between the average and lowest accepted prices, narrowed to 0.10 from 0.13 last month, another signal of robust appetite.
The sale marked the first major test of investor sentiment for Japan’s super-long debt since Prime Minister Shigeru Ishiba announced his resignation, a move that has cast uncertainty over fiscal and monetary policy ahead of the ruling Liberal Democratic Party’s leadership contest on Oct. 4.
Political Transition in Focus
Hardline conservative Sanae Takaichi and Agriculture Minister Shinjiro Koizumi have emerged as the leading contenders to succeed Ishiba. A Takaichi victory could pave the way for prolonged monetary easing and looser fiscal spending, while Koizumi is seen as a more fiscally moderate candidate who would likely support continued interest rate normalization.
The leadership change has clouded the outlook for the Bank of Japan’s next policy steps. While the spread between five- and 20-year yields has recently narrowed, Japan’s yield curve remains the steepest among major developed economies, raising borrowing costs for a government with the world’s heaviest debt burden.
BOJ Policy Path
Traders have recently raised bets on further BOJ tightening after Bloomberg reported the central bank may raise rates again this year despite political volatility. Overnight index swaps now imply a 59% probability of another hike by year-end.
The BOJ is expected to keep its benchmark rate steady at 0.5% at the conclusion of its two-day policy meeting on Friday.
