Demand at Japan's two-year government bond auction weakened as markets increased bets on tighter Bank of Japan policy and Japanese long-term yields rose. The bid-to-cover ratio fell to 2.97 from 3.63 at the previous auction and a 12-month average of 3.74. The tail spread widened to 0.034 from 0.007 last month, marking its weakest level since 2016. The Ministry of Finance's 488th two-year JGB issue, carrying a 1.700% coupon, had a lowest accepted price of 99.95 yen, below market expectations. The benchmark newly issued 10-year JGB yield rose 0.035 percentage point to 2.925% and reached 2.930% during the session as buyers remained scarce. The government led by Japanese Prime Minister Sanae Takaichi supports a rate increase as early as September, while overnight index swaps imply about an 84% probability of a hike. Investors are watching upcoming medium-term and super-long-term bond auctions for signs of further demand weakness, as higher rates could raise mortgage and corporate funding costs.