TOKYO: Yield curves for Japanese government bonds steepened on Monday on speculation that the Bank of Japan will change its policy and as traders took positions ahead of a 20-year JGB auction later in the week.
The 30-year JGB yield rose to as high as 0.555 percent , its highest level since late March and last stood at 0.550 percent, up 4.0 basis points.
The 20-year yield hit a six-month high of 0.475 percent while the 40-year yield hit a six-month high of 0.615 percent.
The Bank of Japan is studying several options to steepen the bond yield curve, sources familiar with its thinking said.
Traders were also preparing for an auction of 1.1 trillion yen ($10.74 billion) of 20-year JGBs on Tuesday, which they worry could draw weak demand due to speculation that the BOJ could change its policy stance.
"Given the market anxiety over the BOJ, few would be ready to buy at the auction, especially around the current yield levels," said Jun Fukashiro, head of fixed income investment at Sumitomo Mitsui Asset Management.
The market was also affected by the sell-off in global bonds after the European Central Bank bluntly denied it had any discussion on easing last week.
Investors are also starting to fret that the U.S. Federal Reserve might be serious about lifting U.S. interest rates as early as next week as some Fed members have been trying to convince markets that the September meeting would be "live" for a hike, even though futures only imply a one-in-four chance of a move.
On the other hand, the yields on shorter-date JGBs dropped, as investors bet the BOJ may cut interest rates further in order to steepen the yield curve.
The two-year yield fell 4.5 basis points to minus 0.250 percent, its lowest level since Aug 1.
The yield spread between two- and 30 year bonds widened to 80 basis points, the largest since mid-March, up from around low around 35 basis points hit in late June but still below around 120 basis points before the BOJ introduced negative interest rates in January.
Caught in the middle, the 10-year JGB yield rose just 1.0 basis point to minus 0.010 percent.
The price of 10-year JGB futures rose 0.04 point at 151.17 .
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