Japanese government bonds rose on Monday in reaction to gains in US Treasury prices, but room to rise was limited by data showing Japan's economy continuing to recover and Tokyo share prices hovering around five-year highs.
With many participants already on year-end holidays, trading was subdued and players kept a cap on the market by selling when prices rose to pocket profits, traders said.
"JGBs followed US Treasuries higher earlier in the session but as Tokyo shares stayed firm throughout the day gains were limited," said a trader at a Japanese bank.
A lack of new supply until mid-January ensured market stability, prompting players to buy longer-dated JGBs, which carry higher yields. But wariness over consumer price data due out on Tuesday knocked down two-year JGBs and interest rate futures, the trader said.
Ten-year JGB futures for March delivery ended the day session up 0.13 point at 136.68, retreating from an intraday high of 136.80.
The yield on the benchmark 10-year JGB fell 3 basis points to 1.52 percent. The 30-year yield fell by a similar amount to 2.33 percent. The 20-year yield fell 1 basis point to 2.025 percent while 5-year JGB was flat at 0.905 percent.
The two-year JGB yield rose 1 basis point to 0.295 percent.
The benchmark December 2006 euroyen interest rate futures contract fell 0.010 to 99.555, indicating an interest rate of 0.445 percent around that time.
The Nikkei average ended up 1.04 percent at 16,107.67, its highest closing level since October 2000.
Japanese financial markets were closed on Friday for a national holiday.
A government survey released before the market opened showed business sentiment at big manufacturers in the three months to December rose to plus 10.5 from plus 6.4 in July-September, with outlooks of plus 6.9 for January-March next year and plus 6.2 for April-June.
"The survey is a confirmation that Japan's economic fundamentals remain sound and will not alter market expectations for a Bank of Japan policy shift next year," said Tatsuo Ichikawa, chief JGB strategist at ABN Amro Securities.
The BOJ is expected to end its "quantitative easing" policy of flooding the markets with excess funds around mid-2006 as the economy grows.
The central bank has said it will consider an exit from the policy when it confirms a steady rise in consumer prices and is confident Japan will not slip back into deflation.
JGB market participants will closely monitor nation-wide CPI data for November due at 8:30 am on Tuesday (2330 GMT Monday).
"On top of a heavy auction schedule in January, if a rise in consumer prices is confirmed, the market will shift its focus to the approaching timing of a BOJ policy shift and keep up pressure especially on the shorter maturities," said Makoto Yamashita, chief JGB strategist at Lehman Brothers.
Analysts expect a 0.1 percent year-on-year rise in November after a flat reading for October, with projections for a continued rise until around March, which could give ample time for the central bank to reach a conclusion.
The Ministry of Finance will offer 10-year bonds on January 11 and plans to offer all maturities next month except 10-year inflation-linked bonds.
"Support from a lack of new supply will be short-lived," Yamashita said.
US Treasury prices rose on Friday on weak new home sales data that suggested to some traders that the Federal Reserve could end its tightening cycle sooner than expected.
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