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(Bloomberg) -- Japan’s two-year government bond auction Friday was met with weak demand, as rising expectations of a near-term Bank of Japan rate hike sapped investor appetite.

The bid-to-cover ratio was 3.53, compared with 4.35 at the previous sale in October, and a 12-month average of 3.66. In another sign of weak investor demand, the tail, or gap between average and lowest-accepted prices, was 0.012, compared with 0.002 last month. Bond futures held on to small losses after the auction.

The sale came as expectations for a Bank of Japan rate hike in December continue to build due to sustained yen weakness. Overnight index swaps suggest traders are now pricing in a 57% chance of a move by next month, up from 32% two weeks ago.

Meanwhile, the two-year government bond yield, which is sensitive to monetary policy expectations, has climbed to 0.975%, its highest level since 2008.

What Bloomberg strategists say:

That was a mediocre 2-year JGB sale with the bid-cover-ratio slightly below the 1-year average and the average yield just below 1%, bond futures are slightly lower.

Investors are edgy ahead of BOJ Governor Ueda’s speech next week which looks like it will be the make-or-break factor for an interest-rate hike in December. There was another slew of strong data today, but Ueda has been reluctant to sound hawkish since Takaichi became Prime Minister.

— Mark Cranfield, Markets Live Strategist. Read more on MLIV.

In a meeting Thursday, primary dealers have requested more sales of two-, five- and 10-year notes, as well as a decrease in issuance of super-long bonds.

“Investors may have been reluctant to buy given the possibility of increased issuance,” said Kazuya Fujiwara, a fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities. They were waiting to assess the details of the Ministry of Finance’s revised issuance plan following the supplementary budget, he added.

Even so, the two-year sector is seen as relatively well-supported thanks to demand from overseas investors and its role as collateral in BOJ operations, which tends to keep supply-demand conditions tight.

Attention now turns to a speech from BOJ Governor Kazuo Ueda on Monday. With fiscal concerns simmering in the background, investors are likely to remain focused on any indications of changes in the timing of BOJ normalization.

Tokyo’s inflation held steady in November and industrial output unexpectedly rose, keeping the BOJ on track to increase interest rates soon.

(Updates with analyst comments.)