Japanese bonds hold steady as BOJ hikes cast pall over 5-year auction

Japanese government bonds (JGBs) held steady on Tuesday as prospects for further Bank of Japan rate hikes loomed over an auction of 5-year notes.

• Benchmark 10-year JGB futures 2JGBv1 rose 0.19 yen to 126.2, with a trading volume of 3,892 lots. Cash bonds had yet to move in early trading.
• The Ministry of Finance will sell about 2.5 trillion yen ($16.28 billion) of 5-year JGBs later in the day. The yield on the securities jumped to a record 2.31% last week.
• A recent auction of 2-year notes drew weak demand despite their high yield, as investors were deterred by uncertainty over the pace of BOJ rate hikes and the terminal policy rate, according to SMBC Nikko Securities analyst Lisa Mochizuki.
• "Against this backdrop, we forecast a somewhat weak auction result," Mochizuki wrote in a note.

Markets are pricing in a 99% chance that the BOJ will raise its policy rate by 25 basis points to 1.25% at its meeting next week, according to money market broker Tokyo Tanshi. Another increase to 1.5% is fully priced in, the data showed.

Economic data suggested Japan's economy was robust enough to weather a rate hike. Japan's real wages rose 2.4% in July from a year earlier, marking the biggest increase since May 2021 and the seventh consecutive monthly gain, government data showed on Tuesday.

Another data release showed Japan's economy grew faster than initially estimated in the April-June quarter from the previous three months, supported by capital expenditures.