Benchmark 10-year Japanese government bond futures prices extended their sharp gains of the previous session to hit a one-month high on Monday, as a rise in US Treasuries last week helped improve sentiment in the bond market.
The five-year sector, which is more sensitive to rising interest rates than longer maturities, led the rally as investors bought back bonds after the Bank of Japan offered little in the way of surprises in its twice-yearly outlook on prices and the economy released on Friday.
Traders said the market's focus is likely to shift to movements in the US Treasury market and US economic indicators after Federal Reserve Chairman Ben Bernanke made clear last week that the central bank is close to taking a break from its rate-tightening campaign.
June 10-year JGB futures ended the day session up 0.54 point at 133.14, climbing back above 133 for the first time in a month. In the previous session they posted their biggest one-day jump in five and a half months on a wave of short-covering.
Adding in Friday's rise, it was the biggest two-session gain since November 2003.
The benchmark 10-year yield fell 4.5 basis points to 1.875 percent, well below the 2.0 percent hit last month for the first time since August 1999.
The five-year yield sank five and a half basis points to 1.300 percent, a one-month low.
The BoJ said on Friday it expects inflation to pick up over the next two years on the back of steady economic growth. The prices outlook report merely confirmed market expectations for a rate increase as early as July, traders said.
A JGB strategist at a foreign securities firm said since the BoJ was likely to raise interest rates more than once this fiscal year, any rise in the short to medium sectors would be capped.
Money market rates nudged up as funding activity picked up.
The BoJ steadily reduced the excess funds in the banking system, with banks' current account deposits parked at the central bank falling to 18 trillion yen from 19 trillion yen on Friday.
Japan's Ministry of Finance said on Friday it will boost issuance of 30-year debt and 10-year inflation-linked bonds while cutting sales of 15-year floating-rate paper.
As a result, the total amount of debt issuance for this fiscal year will decrease to 117.6 trillion yen ($1.035 trillion) from the initially planned 118 trillion yen, it said.
"The MOF's decision was in line with what the market already expected," said Kazuhiko Sano, chief bond strategist at Nikko Citigroup. "It had no immediate impact."
With a drop in 15-year floating-rate bond issues expected to reduce demand for super-long bonds, which had been bought as a hedge against floating bonds, the increase in 30-year bonds was weighing on investor sentiment, traders said.
The 30-year sector underperformed other maturities, with the yield inching down half a basis point to 2.440 percent. The 20-year yield was down two basis points at 2.205 percent.
US Treasuries rose on Friday despite solid first-quarter US economic growth data as softer numbers on Midwest business activity left expectations for a pause in rate increases.
December euroyen futures rose 2.5 basis points to 99.340, reflecting expectations for the BoJ to raise rates to at least 0.5 percent by the year-end.
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