The auction of Japan's ten-year treasury bonds is imminent: the yield is approaching the 3% mark, and the central bank's interest rate hike expectations are in focus

The Zhitong Finance App notes that Japan's 10-year treasury bonds auctioned on Tuesday will test market demand for this critical term bond. Currently, the yield is approaching the 3% mark, and investors are also planning ahead of the Bank of Japan's interest rate hike measures.

On Monday, the yield hit a three-year high of 2.95% and continued to approach 3% before the Bank of Japan made an interest rate decision on September 18. In his speech last week, Bank of Japan Vice Governor Ryozo Himino reserved the possibility of raising interest rates this month.

Ryutaro Kimura, senior bond strategist at BNP Paris Asset Management in France, said: “If investors take a more wait-and-see attitude before the September meeting, the 10-year Japanese treasury bond auction results are likely to be weak. However, it is expected that some investors will see the 3% 10-year yield as an attractive level and increase purchases, which may prevent the yield from breaking significantly above 3%.”

Japan's bond market has changed drastically since the Bank of Japan ended the last negative interest rate policy in the world in 2024. Higher yields are driving up borrowing costs for governments, businesses, and households, while also making domestic Japanese bonds more attractive to domestic investors than overseas assets.

In the two-year Japanese bond auction held last week, market demand was weak; while overnight index swaps (OIS) showed that the probability that the Bank of Japan would raise interest rates in September was about 70%. According to people familiar with the matter, the government led by Prime Minister Takaichi Sanae supports a recent rate hike, and the next move is likely to take place in September or October.

Okasan Securities strategists Naoya Hasegawa and Yuuki Kimura stated in the report: “The dismal results of last week's two-year treasury bond auction show that the underlying foundation of the market is still weak. If the 10-year treasury bond auction also underperforms, the upward pressure on the yield to 3% may increase further.”

US Treasury Secretary Bessent said in an interview with the media that he believes the Japanese government and the Bank of Japan “will take steps that will help boost the yen exchange rate.” Even though Japan spent a record $96.4 billion to support the yen over the past month, the yen exchange rate hovered around 160 yen per dollar, further increasing the pressure on austerity policies.

Investors will also keep a close eye on the 30-year Japanese Treasury bond auction to be held on Thursday as concerns about high market policies and fiscal measures continue to suppress ultra-long-term bonds. Weak demand for treasury bond sales this week may trigger a wave of sell-offs affecting the world, which in turn will challenge Bezent's efforts to reduce long-term yields on US bonds.

The 10-year treasury bond auction results will be announced at 12:35 p.m. Tokyo time on Tuesday. Investors will pay close attention to bid multiples as a key measure of demand. The bid multiplier for the last auction last month was 2.56, the lowest level since May 2025.