Japanese government bond futures edged down on Monday in sluggish trade as Tokyo shares gained ground after a jump in US stocks the previous session, with futures volume at its weakest since early May.
Analysts said JGBs may trade softer in the near term as moves by the Federal Reserve and the European Central Bank to inject extra funds into the banking system have restored some calm to credit markets, hurting short-term Treasuries. Investors are also wary of building up JGB holdings before remarks from Bank of Japan officials this week after the central bank left rates on hold on Thursday but kept alive the possibility of an interest rate hike in September or October.
Traders said ECB President Jean-Claude Trichet, who is scheduled to speak later in the session, may have a bigger impact on JGBs as his comments could alter expectations for future monetary policy at the BoJ.
The ECB reminded the markets last week of its August 2 monetary policy stance, a move seen as signalling its intention to raise rates at its September 6 meeting despite recent market turbulence. Analysts say the chances of a BoJ rate hike in September could be boosted if the ECB decides to raise interest rates at its policy meeting next week.
"Comments from Trichet could set the direction for the JGB market ahead," said a senior trader at a Japanese bank. September 10-year futures ended the day session down 0.09 point at 135.44, well below the 18-month peak of 136.46 hit last Tuesday. The volume traded in the day session was 27,590 contracts, the lowest since May 7.
Benchmark 10-year yields rose 2.5 basis points to 1.615 percent, while five-year yields edged up a basis point to 1.170 percent. The 20-year yield rose 2 basis points to 2.080 percent, as investors get ready for Tuesday's 20-year debt auction.
The Nikkei share average ended the session up 0.3 percent after tracking a jump on Wall Street on Friday to rise more than 1 percent earlier in the session.
Futures nudged up into positive territory at one point as worries over global liquidity and a credit squeeze lingered, providing some support. "Panic buying of bonds has receded," said Takafumi Yamawaki, a fixed income strategist at Morgan Stanley in Tokyo.
"Now the market is trying to find a new trading range." Some traders kept an eye on US existing home sales for July due later in the session after last week's data showed July US durable goods orders growth recorded the biggest rise since September and a better-than-expected new home sales. Although these figures predated the start of the global liquidity squeezes in the past few weeks, they helped calm market nerves.
They were also waiting for comments from BoJ officials for clues their monetary policy. BoJ Deputy Governor Toshiro Muto is visiting Beijing from Monday and is scheduled to speak to a forum on Japan-China economic cooperation on Tuesday.
BoJ board member Atsushi Mizuno, who was the only board member to vote against the central bank's decision to keep interest rates on hold at 0.5 percent at last week's policy meeting, will speak on Thursday.
Swap contracts on the overnight call rate show investors see around 47 percent chance of a BoJ rate hike in September and near 60 percent chance of a hike in October. Analysts said they saw little near-term market impact from Prime Minister Shinzo Abe's cabinet reshuffle to be unveiled later this session. Media said Abe has picked veteran lawmakers for key posts in a new cabinet line-up.
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