Japan's Bond Auction Sees Lower Demand Amid Election Uncertainty

On February 3, Jin10 reported that demand for Japan's 10-year government bond auction fell below the 12-month average as investors grew cautious ahead of the upcoming House of Representatives election. The bid-to-cover ratio for the auction was 3.02, down from the previous auction's 3.30 and the 12-month average of 3.24. The tail spread remained at 0.05, consistent with last month. Traders are bracing for market volatility leading up to the February 8 election.Recent polls indicate that Japan's ruling coalition is likely to secure 300 out of 465 seats, with the Liberal Democratic Party expected to achieve a single-party majority. This outcome would enable Prime Minister Sanae Takaichi to advance her fiscal stimulus plans, potentially increasing the government's debt burden. Last month, Japanese government bond yields surged to multi-year highs, triggered by Takaichi's proposal to cut the consumption tax. Although yields have since eased, the benchmark 10-year bond rate remains near 2.25%, the highest since 1999.Overnight index swaps suggest a 76% probability of a rate hike by April, with the market fully pricing in a 25 basis point increase by June.