Fukui's comments were just very hawkish overall. There's certainly room for short-term yields to rise and the yield curve to flatten more as the market factors all this in.
Government debt sold off too much. Yields are high enough to lure investors. Yields already reflect speculation that a rate increase may come in the fourth quarter of 2006.
Market players are expecting that Mizuno and Fukui may start preparing the markets gradually for an eventual increase in interest rates, and are listening carefully to their speeches.
Some market participants are expecting no rate increase unless CPI increases to 1 percent, but if Mizuno suggests the BOJ can hike rates before, it could be a selling factor for bonds.
Some people were concerned that with yields below 2 percent there might not be enough demand for the bonds. However, the auction went okay and that spurred buying of futures.
Market participants are generally wary of the uncertainty over the rate increase outlook, and are selling to hedge against such worries.
Investors aren't sure if they should buy more longer-dated bonds with yields this low.
There was a risk he would make more hawkish comments. He reaffirmed that even if the Bank of Japan ends its easy monetary policy it probably won't be increasing interest rates anytime soon.
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