Global equity and bond markets stabilized on Tuesday following early-week sell-offs, as strong demand at Japan's government bond auction and a recovery in cryptocurrency markets alleviated investor concerns about liquidity tightening.

The Japanese 10-year bond auction attracted solid demand from institutional investors including pension funds, improving sentiment across Asian markets. Bitcoin rose 0.7% to $87,053.6 while Ethereum gained 0.5% to $2,806.78, halting their previous declines of over 5%.

The yen stabilized against the dollar as Japanese equities edged higher. Both the benchmark Nikkei 225 and Topix indices rose 0.1%, while the yen weakened slightly by 0.1% against the dollar. Other Asian markets showed muted movements, with Hong Kong's Hang Seng Index flat, China's CSI 300 up 0.5%, and South Korea's Kospi gaining 1.7%.

Market volatility had been triggered by Bank of Japan Governor Kazuo Ueda's comments that fueled expectations for the central bank's first rate hike in nearly a year. This pushed Japanese bond yields to multi-year highs, spilling over into global debt markets and triggering sell-offs in risk assets including Bitcoin.

The Japanese bond auction proved crucial in calming markets, with the benchmark yield reaching 1.88% before the sale - its highest level in 17 years. These relatively attractive yields drew strong demand from pension funds and other investors.

Mizuho Securities chief strategist Shoki Omori noted, "The market appears to have largely priced in a December rate hike." Speculation about potential BOJ action lifted shares of Japan's major banks, with Mitsubishi UFJ Financial Group rising 2.5% and Sumitomo Mitsui Financial Group closing up 3%.

The cryptocurrency market stabilized after Monday's sharp declines, with Bitcoin's rebound to $87,000 helping ease concerns about risk asset liquidity. The earlier 5% drop had been driven by rising yields on safer assets following the Japanese bond market turmoil.

Analysts suggest the yen's persistent weakness increases pressure for a December rate hike. Neil Newman, Japan strategist at Astris Advisory, stated: "We're in a situation where Japan's finance ministry has signaled readiness to intervene to support the yen if needed, while small businesses face pressure from high input costs due to currency weakness. The BOJ must act in December."

The yen's steady decline over the past two months and recent bond yield volatility have sparked speculation about unwinding of yen carry trades - where investors borrow cheap yen to fund higher-yielding assets. However, JPMorgan senior economist Benjamin Shatil noted no immediate catalyst for such unwinding, with low yen volatility suggesting investors may still be adding carry trade positions.