By Rocky Swift and Junko Fujita

TOKYO (Reuters) -A lacklustre auction for Japan's longest-dated bonds on Wednesday did little to relieve sovereign debt markets where fiscal deficit concerns have driven a worrying surge in long-term yields.

Heavily indebted Japan's government bonds have become the "canary in the global duration coalmine," Goldman Sachs analysts wrote last week after a very poor sale of 20-year bonds.

The Ministry of Finance sold about 500 billion yen ($3.46 billion) of 40-year bonds with a bid-to-cover ratio of 2.21, the lowest since a sale in July last year and well below the historical average of 3, signifying tepid demand.

The poor results come a week after Japan's 40-year yields touched a record high 3.675%, along with an all-time high for 30-year paper and a multi-decade peak for 20-year debt.

On Tuesday, bonds rallied after the Ministry of Finance was said to have circulated a survey among major bond buyers and accelerated gains after Reuters reported the ministry is considering reductions to its sales of super-long bonds.

The swift recovery in JGBs in the previous session may have damped demand at the 40-year auction, said Shoki Omori, chief desk strategist at Mizuho Securities. He added that sovereigns like the United States and Japan will likely face ever steeper borrowing costs.

"Even if many countries cut the issuance, there is going to be pressure for long-end yields to go higher, so that's a scary one," Omori said.

JGB yields ticked higher and the yen erased losses after the auction on Wednesday. Thirty-year yields were affected the most, up 10 basis points on the day at 2.93%, while 40-year yields rose 5 basis points to 3.335%.

Long-dated debt has sold off globally in recent weeks on concerns tax cuts and a chaotic roll-out of sweeping tariffs by U.S. President Donald Trump will stoke inflation and impel governments to spend more. That has driven up the term premium - the extra yield offered to buyers in exchange for locking up their money in longer-dated securities.

Moody's on May 17 became the last major rating agency to strip the United States of its top grade because of growing debt, which stands at about 124% of GDP.

But the situation is more precarious in Japan where the debt ratio is double that and the central bank has slashed its bond buying to support the economy. The Bank of Japan still holds more than half of all outstanding JGBs, a holdover of decades of monetary stimulus.

Finance Minister Katsunobu Kato warned on Tuesday that higher rates could further imperil Japan's finances and pledged "appropriate" management of its debt.