Japan bonds rise after dovish BOJ stokes demand at two-year auction

By Kevin Buckland

TOKYO, Oct 31 (Reuters) - Japanese government bonds rose on Friday, reversing earlier losses, after strong demand at an auction of two-year notes ended a run of weak sales for the tenor.

Investors returned to the debt after Bank of Japan Governor Kazuo Ueda adopted a relatively dovish stance on Thursday, following the central bank's decision to again hold off on raising interest rates.

"It is likely that renewed buying interest emerged in the two-year sector (after) a hawkish surprise was averted, and expectations for increases in policy rates over the short- to medium-term eased," said Shoki Omori, chief desk strategist at Mizuho Securities.

"Although the two-year sector is currently assessed as rich on the yield curve, demand remained resilient."

The two-year JGB yield JP2YTN=JBTC declined 1.5 basis points (bps) to 0.91% after the auction results were announced. Earlier in the day, the yield had edged up to 0.93%. Bond yields move inversely to prices.

A closely watched indicator of demand called the bid-to-cover ratio, which measures the amount of bids received against the amount of bonds on offer, rose to 4.35 at the same, returning to long-term averages after two months of successive 16-year lows.

The so-called tail, measuring the difference between the average and lowest prices at the sale, contracted to 0.002 yen, the smallest in more than four years.

The five-year yield JP5YTN=JBTC was flat at 1.21%, shedding an earlier 1.5 bps rise.

The 30-year yield JP30YTN=JBTC fell as much as 1 bp to 3.025%, a three-month low.

Other tenors had not yet traded following the auction results.