Japanese government bonds were mixed on Monday as gains in US Treasuries helped futures prices recover slightly, while a firm tone in the Tokyo stock market kept investors cautious about buying.
September 10-year futures managed to pull back from a two-week low hit on Friday, thanks to a rally in US Treasuries following data showing surprisingly weak US economic growth. Yet, dealers remained reluctant to buy bonds aggressively ahead of a 10-year auction on Tuesday, traders said.
"Some people see Friday's sell-off as having been overdone, so we're seeing some short covering today," said Tetsuya Miura, bond strategist at Shinko Securities. "But stocks are continuing to climb, so there is a definite awareness that the market's upside is limited."
Miura added that Friday's slide, which had pushed the 10-year yield to its highest level since mid-July, had been prompted in part to secure a 1.9 percent coupon at Tuesday's auction as well on speculation for a solid reading in second-quarter US gross domestic product.
In the end, data showed that the US economy grew only 2.5 percent in April-June, weaker than expectations for a 3.0 percent gain and significantly lower than the 5.6 percent expansion of the previous three months. September futures rose 0.05 point to 132.00, recovering from a slide to 131.78 on Friday for the first time since mid-July. The benchmark 10-year yield fell 0.5 basis point to 1.915 percent after rising as high as 1.93 percent on Friday.
In contrast, the 20-year yield edged up 0.5 basis point to 2.340 percent. The two-year yield also rose 0.5 basis point to 0.825 percent. The Nikkei average climbed 0.74 percent to 15,456.81. It briefly pushed above 15,500 for the first time since July 10 due to solid quarterly corporate earnings reports.
Analysts expect Tuesday's 1.9 trillion yen ($16.6 billion) 10-year JGB auction to attract fair demand, although they said few would be keen to aggressively gobble up the new bonds.
"A 1.9 percent coupon should attract fair demand from domestic investors," said Tatsuo Ichikawa, a fixed income strategist at ABN Amro Securities. Although this would be lower than a 2.0 percent coupon at an offer last month, domestic pension funds and life insurers, which favour absolute yields, were expected to show some interest in the new offer.
Such long-term investors could pick up the new issue to fulfil their buying requirements, given that they have been slow to buy since the financial year began in April as yields have remained lower than many investors' target buying levels, analysts said.
Still, some said pension funds and life insurers would buy carefully, as the market expects Japanese interest rates to rise further, albeit slowly, after the Bank of Japan raised rates earlier in the month for the first time in six years.
Japan's industrial output rose a stronger-than-expected 1.9 percent in June from the previous month. "Market players are wondering which has more impact to the market at the end of the day, Japan's solid output data or softer US growth data," said Takafumi Yamawaki, fixed-income strategist at Morgan Stanley.
To decide whether they should trade on healthy data from Japan or weak figures from the United States, market players will look closely to economic reports from Japan, including growth figures for the April-June quarter due next week, Yamawaki said.
Besides Tuesday's auction, the market was anticipating a speech on Wednesday by BoJ board member Atsushi Mizuno, who is often seen as one of the central bank's more hawkish members, as well as an offer of 10-year inflation-linked bonds on Thursday.
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