Japan 10-year bond sale passes smoothly after yield hits 3%

A sale of Japan’s 10-year government debt passed smoothly after the yield on the key maturity hit the milestone of 3% and investors were positioned for an interest rate hike.

The bid-to-cover ratio at Tuesday’s sale was 3.29, compared with 2.56 at the last auction and a 12-month average of 3.26.

The 10-year yield touched a three-decade high of 3% on Tuesday shortly before the auction and ahead of the central bank’s Sept. 18 policy decision. Bank of Japan Deputy Governor Ryozo Himino kept the door open to an increase this month in a speech last week.

“The result was as expected by the market, or perhaps slightly weaker than anticipated,” said Miki Den, senior rates strategist at SMBC Nikko Securities Inc. “The auction showed that investors are looking for a yield above 3% on 10-year JGBs.”

Japan’s bond market has changed dramatically since the central bank ended the world’s last negative interest-rate policy in 2024. Rising yields are increasing borrowing costs for the government, companies and households, while making domestic bonds more competitive with overseas assets for Japanese investors.

An auction of two-year debt last week saw weak demand, with overnight index swaps showing around a 90% chance of a BOJ rate increase in September. Prime Minister Sanae Takaichi’s government is supportive of a near-term rate hike, with the next move likely either in September or October, according to people familiar with the matter.

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