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[Japanese Government Bonds Rise as Lower US Treasury Yields Drive Buying] ⑴ Japanese government bonds rose on Thursday, following the decline in US Treasury yields during the Asian session. The weak performance of the 10-year bond auction was largely ignored by the market. ⑵ The 10-year bond yield had fallen by about 6 basis points before the auction, resulting in a tail spread of about 3 basis points. The subscription ratio was only 3.21, the lowest since August. ⑶ Although the auction results were slightly weaker than expected, the market accepted the relatively long tail spread given the significant decline in yields prior to the auction. ⑷ Futures opened about 10 ticks higher than the previous day, then briefly fell to the day's low before quickly rising to around 126.99 before midday. ⑸ Futures further extended their gains to 127.13 in the afternoon, as short sellers worried about a potentially strong 10-year auction, given that the 10-year yield had fallen by about 35 basis points from the previous auction last month. (6) Futures prices retreated from their highs after the auction, but remained around 127.00 throughout the day. The yield on 10-year US Treasury bonds remained around 4.84%, while ultra-long-term Japanese government bonds continued to see strong buying interest. (7) The yield on 30-year Japanese government bonds fell by about 8 basis points to 3.845% at one point, before rebounding slightly. The yield on 24-year bonds fell by about 12 basis points. (8) A trader at a Japanese securities firm said that the Democratic victory in the US midterm elections boosted bonds, but the rally may soon lose momentum. (9) The trader said that the auction saw orders from clients, including those with offshore accounts, but there was no follow-up buying in the secondary market. Recent buying has come more from corporate accounts and educational institutions than from professional investors. (10) The Bank of Japan released the minutes of its September policy meeting, which included discussions not mentioned in the summary of opinions in early October. The committee members exchanged views on the neutral interest rate and the terminal interest rate. (11) Some members mentioned that the forward rate in the OIS market for 2 years and 1 year has already exceeded 2%. Other members believed that the natural interest rate plus a 2% inflation target implies that interest rates should be higher than 2%. Still others felt that market expectations for further tightening were slightly too high. (12) Most members believed that the neutral interest rate is difficult to observe directly and identify in advance. The Bank of Japan should adjust the degree of easing and monitor economic and price developments to explore the neutral interest rate.