Global markets temporarily catch a breath? Bitcoin halts its decline and Japanese bond auction eases liquidity concerns

After the wave of sell-offs at the beginning of this week, global stock and bond markets stabilized on Tuesday. Strong demand in Japan’s government bond auction and a rebound in the cryptocurrency market together eased investor concerns about tight liquidity.

On Tuesday, the auction of Japan’s 10-year government bonds attracted robust demand, including from pension funds, which helped revive market sentiment in Asia. Bitcoin rose 0.7% to $87,053.6, and Ethereum increased 0.5% to $2,806.78, halting a previous drop of more than 5%.

The yen stabilized against the dollar, and Japanese stocks closed slightly higher. The benchmark Nikkei 225 index and the TOPIX both rose 0.1%, while the yen weakened 0.1% against the dollar. Other Asian markets remained steady: the Hong Kong Hang Seng index was flat, China’s CSI 300 index rose 0.5%, and South Korea’s Kospi index increased 1.7%.

The market volatility stemmed from comments by Kazuo Ueda, which led investors to believe the Bank of Japan might raise interest rates for the first time in nearly a year. This pushed Japanese bond yields to multi-year highs and affected global bond markets, while also triggering a sell-off in risk assets like Bitcoin.

Japanese Government Bond Auction Stabilizes Market Sentiment

Japan's 10-year government bond auction was key to market stabilization on Tuesday. Before the auction, the benchmark bond yield reached 1.88%, a 17-year high. This relatively high yield attracted investors, including pension funds.

Mizuho Securities Chief Strategist Shoki Omori said: "The market seems to believe that (a rate hike in December) is basically a done deal." Fresh speculation about a potential Bank of Japan rate hike drove up shares of Japan’s major banks. MUFG, the largest bank, saw its stock rise 2.5% on Tuesday, with its biggest competitor SMFG closing up 3%.

Comments from Kazuo Ueda pushed Japanese government bond yields to multi-year highs—bond yields move in the opposite direction to prices—and triggered a decline in other global bond markets. Higher yields in safer assets caused the price of Bitcoin to drop more than 5%.

Cryptocurrency Market Rebounds

After experiencing a sharp decline earlier, the cryptocurrency market stabilized on Tuesday. Bitcoin once rose 0.7% to $87,000, and Ethereum climbed 0.5% to $2,806.78. This rebound eased market concerns about liquidity for risk assets.

On Monday, Bitcoin fell more than 5%, mainly due to rising Japanese bond yields leading to higher returns on safer assets. With the crypto market returning to calm, global market anxiety has subsided.

Weak Yen Increases Pressure on Central Bank to Hike Rates

The yen continued to weaken against the dollar, and analysts believe this increases the likelihood that the Bank of Japan will hike rates in December. Neil Newman, Japan strategist at Astris Advisory, pointed out: "We are facing a situation where the Japanese Ministry of Finance has signaled readiness to intervene at any time to support the yen if necessary, and there are signs smaller companies are feeling the pressure of higher input costs due to currency weakness. I think the Bank of Japan must take action in December."

Since the new Prime Minister Sanae Takaichi took office two months ago, the yen has steadily declined. Combined with recent sharp moves in Japanese bond yields, there is speculation about the unwinding of so-called "yen carry trades"—a strategy of borrowing yen at low cost to invest in other assets.

However, Benjamin Shatil, senior economist at JPMorgan, said that for now, there does not seem to be any direct catalyst for such unwinding. The low volatility in the yen means investors may still be increasing their carry trade positions.

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