Japan's 20-year government bond auction Tuesday attracted stronger demand than the 12-month average, supported by elevated yields. The bid-to-cover ratio reached 4.01, up from 3.98 previously and above the 12-month average of 3.73. The tail narrowed to 0.15 from 0.17 last month.

Bond futures pared losses following the result. Japanese bond yields have climbed this month as escalating Middle East tensions drove oil prices higher and fueled a selloff in global debt markets. The 10-year Treasury yield breached 5% on mounting inflationary pressures and expectations of Federal Reserve tightening.

Given global upward pressure on rates due to inflation risks, the outcome was not as severe as feared, said Ryutaro Kimura, senior bond strategist at BNP Paribas Asset Management. The benchmark 10-year JGB yield broke through the 3% threshold, its highest in three decades, while the 20-year rate rose to 3.85%, approaching its year-to-date high of 3.9%. The selloff reflects structural forces pushing up long-dated yields across major developed markets, with a gauge of global government borrowing costs rising to levels last seen in 2007.

Investors demand greater compensation for long-maturity debt amid widening fiscal deficits and a flood of issuance funding artificial-intelligence infrastructure. Vigilance remains necessary given rising oil prices and spillover of upward pressure on long-term yields in the US and Europe. Consequently, a sustained decline in super-long JGB yields remains difficult to expect.

The Bank of Japan is widely expected to raise interest rates this week, with overnight index swaps pricing a hike. Traders will focus on Governor Kazuo Ueda's press conference for signals on further tightening. Meanwhile, Japan's ministries requested a record amount of spending for the next fiscal year, intensifying scrutiny over financing and whether additional bond issuance will be needed.