The latest Japanese 2-year government bond auction signals a cooling demand—this time, the bid-to-cover ratio was only 3.26, a significant drop from 3.53 last time and below the average of 3.65 over the past year.

Following the results, the 2-year government bond yield rose by 1 basis point to approximately 1.11%. Meanwhile, the 10-year government bond futures prices declined simultaneously.

Why is the market reacting so strongly? The key lies in the shift in expectations behind the scenes. Investors are increasingly believing that the Bank of Japan may need to accelerate interest rate hikes to address inflation pressures while also stabilizing the yen exchange rate. The decreased demand at the government bond auction precisely reflects this change in sentiment—institutional investors are reassessing the risk-reward balance, and bets on future rate hikes are heating up.