"Today's strong results may not have direct implications going into the 20-year auction on Thursday as the buyers of the two sectors are different. But it improves market sentiment as a whole, as during the past two weeks the intermediate sector has been heavy relative to other sectors," said RuiXue Xu, an interest rate strategist at RBS Securities.
In the 2.4 trillion ($26.4 billion) five-year auction, the bid-to-cover ratio, a gauge of demand, rose to 3.36 from 2.90 at the previous sale, the highest since a November tender. "Banks are buyers of five-year JGBs who hold large excess reserves, and the higher bid-to-cover ratio reflects this," Xu said.
Shorter end yields have been pinned down since the Bank of Japan stepped up of its monetary easing in December. Facing government pressure to do more to fight deflation, the BOJ decided to begin supplying three-month funds at an interest rate equal to the overnight call rate of 0.1 percent.
"The auction results were good. The midterm sector remains supported by the BOJ's monetary policy," said Kenro Kawano, a fixed-income strategist at Credit Suisse. "The BOJ is likely to come under pressure to ease more when the yen appreciates, most notably against the dollar."
The dollar hit a four-week low of around 99.40 yen on trading platform EBS on Tuesday. Japan's banks have also helped keep short-end yields low by placing their funds, which have grown due to slack lending, in these maturities.
Japanese bank lending fell from the same period a year earlier for the first time in four years in December as corporate demand for funds stayed weak. Japan will offer 1.1 trillion yen of 20-year JGBs on Thursday and the yield curve steepened as some participants sold in the superlongs to make room on their books for the tender.
March 10-year JGB futures dipped 0.07 point to 139.21 after brushing a two-week peak of 139.40 the previous day. The five-year yield was down 1 basis point on the day at 0.505 percent. The benchmark 10-year yield edged up 1.5 basis points to 1.330 percent. The 20-year yield rose 1.5 basis points to 2.140 percent. The five-year/20-year yield spread widened by 2.5 basis points to 163.5 basis points, edging back towards a decade high above 165 basis points hit earlier in the month.