Japan bonds climb as smooth 30-year auction calms market nerves

By Satoshi Sugiyama

TOKYO, April 7 (Reuters) - Japanese government bonds (JGBs) advanced on Tuesday after a smooth 30-year bond auction reassured investors, easing market concerns that demand for the sale might be weak.

The 30-year JGB yield JP30YTN=JBTC sank 2 basis points (bps) to 3.735%. Yields move inversely to bond prices.

"In the morning session, caution ahead of the auction was probably what pushed long-term and super-long-term yields higher, and in the afternoon session they're simply being bought back in response to the auction result," said Naoya Hasegawa, the chief bond strategist at Okasan Securities, adding that the weak result of last week's 10-year bond auction was also seen as a factor that could weigh on investor sentiment.

The auction's bid-to-cover ratio, a measure of demand, was 3.12 times, compared with 3.66 times at the previous sale.

The benchmark 10-year yield fell 2 basis points (bps) to 2.405% after rising to a 27-year high of 2.43% for a third consecutive session, as higher oil prices, a weaker yen, and concerns over fiscal expansion fuelled inflation worries.

The two-year yield JP2YTN=JBTC, the one most sensitive to Bank of Japan policy rates, decreased 1.5 bps to 1.38%. The five-year yield JP5YTN=JBTC fell 1.5 bps to 1.810%. The 20-year JGB yield JP20YTN=JBTC slid 1 bp to 3.320%.

Markets remained on edge as fragile diplomatic efforts to end the Middle East conflict showed signs of strain, with U.S. President Donald Trump escalating threats of attacks on Iran unless it reopens the Strait of Hormuz, while Tehran rejected Washington's proposal for an immediate ceasefire.

Iran said on Monday it wanted a lasting end to the war with the U.S. and Israel, and pushed back against pressure to reopen the Strait of Hormuz while Trump warned the country could be "taken out" if it did not meet his Tuesday night deadline to reach a deal.

The yield on benchmark U.S. 10-year notes US10YT=RR rose 1.7 basis points to 4.353%, from 4.335% late on Monday.