Benchmark JGBs rally after auction shows strong demand

By Rocky Swift

TOKYO, Sept 2 (Reuters) - Japan's benchmark government bonds (JGBs) rallied on Tuesday after an auction of the debt saw the strongest demand in almost two years.

The 10-year JGB yield JP10YTN=JBTC fell 2 basis points (bps) to 1.560% after the results. The yield had risen in the morning session and last week it touched a 17-year high of 1.63%. Yields fall when bond prices rise.

Japan's Ministry of Finance sold around 2.6 trillion yen ($17.65 billion) of 10-year notes, receiving bids worth 3.92 times the amount sold, the highest ratio since the sale in October 2023.

Also in focus were comments by Bank of Japan Deputy Governor Ryozo Himino, who said the central bank should keep raising interest rates but warned that global economic uncertainty remains high. Himino is due to speak again in the afternoon.

Traders are currently pricing in a 46% chance of a quarter-point increase by end-October.

Separately, on Thursday, the ministry will auction around 700 billion yen of 30-year bonds, a tenor under close scrutiny after a series of record highs last month.

Longer-dated JGB yields have risen to historic highs of late due to concerns about the government's debt pile and deficit spending. Selling intensified after an electoral drubbing last month for the political coalition of fiscal hawk Prime Minister Shigeru Ishiba, leading to speculation that he will be forced to resign.

Government spending requests will likely set a record for the third consecutive year, a draft of the requests obtained by Reuters showed on Monday. The Sankei newspaper said on Tuesday Ishiba plans to ask ministers as early as this week to compile an economic stimulus package.

"We continue to believe that attention should stay focused on the upward pressure on superlong rates for now given the numerous risk factors related to domestic politics and fiscal policy," Yusuke Matsuo, senior market economist at Mizuho Securities, said in a note.

The 30-year JGB yield JP30YTN=JBTC rose 1 bp to 3.2%. It reached an all-time high of 3.235% last Wednesday.