Japanese government bonds first fell and then rebounded, with ultra-long-term bond auctions showing resilience, while expectations of central bank bond purchases affected sentiment at the end of the session.

⑴ Japanese government bond futures came under pressure and weakened in early trading on Tuesday, opening down 24 ticks from the previous day at 127.45. The decline was mainly dragged by rising oil prices and a weaker yen, with most intra-day trading occurring within a narrow range of 127.42 to 127.53.⑵ The yield curve in the spot market steepened at the open: the 5-year yield rose by 2 basis points to 1.96%, the benchmark 10-year yield increased by 2.5 basis points to 2.745%, and afterwards, the 10-year yield swung within an extremely narrow range of 2.74% to 2.745%.⑶ The reopening auction of 40-year government bonds held that day yielded good results, with the withdrawal yield settling at 3.884%, about 1 basis point lower than midday levels. The bid-to-cover ratio reached 2.88, the highest since March 2025, indicating steady demand for ultra-long maturities.⑷ However, the auction results failed to effectively boost the market. The 10-year yield climbed further to 2.75% after the results were announced, the 40-year spot yield briefly rose to 3.91%, and futures slid to an intraday low of 127.39 in the afternoon session.⑸ Toward the end of trading, market sentiment reversed. Futures rebounded sharply in the last 30 minutes and closed at 127.54, mainly supported by expectations that the Bank of Japan will conduct routine bond purchases tomorrow. The 10-year yield pulled back to 2.735%, with ultra-long yields falling in tandem.⑹ In terms of capital flows, there were reports of regional accounts buying short-to-mid-term issues on dips, the 40-year auction attracted participation from overseas accounts and insurance companies, and a pension account bought non-newly issued 40-year bonds.⑺ Market rumors suggest that a major Japanese bank was a key buyer in last week's 20-year auction but simultaneously paid short-end swap rates and sold 5-year bonds yesterday, possibly aiming to construct a curve flattening position. This position currently benefits from Bloomberg reports that Bank of Japan officials are open to accelerating rate hikes, with the 5-year yield up 5.5 basis points at the close compared to the previous day.