TOKYO: Japanese government bond prices eased on Wednesday, with the 10-year yield coming off a three-month low, tracking weakness in US Treasuries after encouraging US retail sales data and signs that Europe's economy is starting to turn around.
The benchmark 10-year yield added 2 basis points to 0.750 percent after hitting a three-month low of 0.730 percent on Monday.
US retail sales excluding cars, gasoline and building materials rose 0.5 percent in July, the largest increase since December, while Germany's ZEW investor sentiment survey came in better than expected.
Comments from a top Federal Reserve official that he would not rule out the possibility that the US central bank might reduce its $85 billion monthly bond-buying programme from September also weighed on US Treasuries, with the 10-year yield nearing a 23-month high touched last month.
"If the 10-year US Treasury yield stays at around 2.7 percent or seeks a higher range, then it will be possible for the JGB yield to shift to the 0.80-percent area," said Maki Shimizu, senior JGB strategist at Citigroup.
But Shimizu said many JGB players had retreated from the market and had not accumulated sizable positions recently, so they may not have a lot to sell, while the Bank of Japan's bond-buying operation was also a powerful influence on the market.
On Wednesday, the BOJ offered to buy 700 billion yen ($7.1 billion) worth of JGBs with residual maturities of one to more than 10 years, as part of its aggressive monetary easing to revive the world's third-largest economy.
The 10-year JGB futures dipped 0.20 point to 143.94 on Wednesday, breaking below their five-day moving average of 144.03. Trading volume was relatively light, with 17,759 contracts changing hands, down from Tuesday's 21,002 and this year's daily average of 30,893.
The 30-day implied volatility on JGB futures <0#JGB+> slipped to a three-month low of 2.54 on Tuesday, sharply below a two-year peak of 6.1 reached on April 12 as market participants struggled to adapt to the BOJ's radical easing scheme announced on April 4. The latest data will be available later on Wednesday.
Barclays Securities recommended investors to buy put options to hedge against any rise in JGB yields after recent flattening in the yield curve.
"If the market has entered the final stage of a bull-flattening phase, there is a need to be cautious about the upside risk to yields, even if they could continue to fall for now," it wrote in a note.
"One effective way to hedge might be to buy put options, which have continued to see a decline in volatility."
The five-year yield was up 1 basis point at 0.280 percent, giving back some of the previous session's 1.5-basis point drop after a strong five-year auction result.
Yields on longer maturities also rose, with the 20-year debt up 2 basis points at 1.660 percent and the 30-year sector up 2.5 basis points at 1.780 percent, respectively. They both hit a two-month low on Tuesday.
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