TOKYO: Japanese government bond prices mostly inched lower on Tuesday as investors prepared for this session's five-year sale, though the superlong sector edged up in thin trading.
The Ministry of Finance offered 2.7 trillion yen ($27.96 billion) of five-year notes, reopening the current issue with a coupon of 0.30 percent.
"Although a serious recovery in demand for JGBs from the banks will probably be needed to generate enough buying to push yields lower, because of the decline in volatility and the sector's cheapness relative to the curve, we expect a decent level of investor demand to result in a strong auction," strategists at Bank of American Merrill Lynch wrote in a note to clients.
If the five-year yield approached 0.3 percent, it would raise demand for bonds as a place to park cash, and this would probably lead to even stronger results, they added.
The yield on the 5-year JGB added half a basis point to 0.290 percent in morning trade, while the yield on the benchmark 10-year bond also edged up half a basis point to 0.750 percent, moving away from a three-month low of 0.745 percent hit in the previous session.
Ten-year JGB futures ended morning trade down 0.03 point at 144.01, moving away from the previous session's three-month intraday high of 144.13.
Prime Minister Shinzo Abe is considering a corporate tax cut as a way to offset the impact of a planned two-stage increase in the sales tax, the Nikkei business daily reported on Tuesday.
Any delay to the planned sales tax increase could pressure JGBs, as it would send the signal that Japan was no longer committed to putting its fiscal house in order.
JGB investors shrugged off data released early in the session showing Japan's core machinery orders fell in June and companies expect them to fall further in the current quarter, another sign that government stimulus has yet to boost capital spending.
Minutes of the Bank of Japan's July meeting released on Tuesday showed most board members agreed that the domestic economy was starting to recover but there were some voices of caution over uncertainty in overseas growth and the outlook for domestic capital spending.
One member said potential instability remains in the JGB market.
The superlong sector outperformed in thin conditions, with the yield on the 30-year JGB shedding half a basis point to 1.770 percent, its lowest since June 10, while the 20-year yield also lost half a basis point to 1.650 percent, its lowest since June 13.
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