Japan¡¯s 20-year government bond auction on Tuesday drew solid demand as higher yields attracted buyers, easing concerns that rising oil prices and inflation risks would damp appetite.

The bid-to-cover ratio rose to 3.25 from 3.09 last month and was roughly in line with the 12-month average. The tail ¡ª the gap between the average and lowest accepted prices ¡ª narrowed sharply to 0.06 from 0.14, signaling stronger bidding.

The 20-year yield extended its drop to 1 basis point following the results, to 3.135%. The rate had climbed in recent weeks amid a global bond sell-off, though it¡¯s still well below the 3.46% peak reached in January.

Based on the metrics, the auction can be considered a good one, said Ryutaro Kimura, a senior fixed-income strategist at Axa Investment Managers. ¡°It appears that investor appetite has improved following the significant rise in interest rates since the latter half of February.¡±

Kimura cautioned that investors remain wary of stagflation risks tied to the prolonged conflict in the Middle East. ¡°It is unlikely that the outcome of this auction will lead to a sustained decline in superlong JGB yields,¡± he said.

¡°JGB futures are modestly higher on relief the 20-year auction attracted demand close to its 12-month average. The low price of 100.65 was also well above the pre-sale forecast and Japan¡¯s biggest banks stepped up to buy a good chunk of the bonds,¡± said Mark Cranfield, Markets Live Strategist at Bloomberg.

Higher oil prices combined with a weakening yen are raising concerns that Japan could face stagflation, a scenario that may prompt greater fiscal spending while complicating the Bank of Japan¡¯s normalization path.

While the central bank is widely expected to stand pat at this week¡¯s meeting, more than a third of economists surveyed by Bloomberg still expect a rate hike as early as April.

Overnight index swaps imply investors are pricing in more than a 60% probability of a move by then, with a 25-basis-point increase fully priced in by July.