The yield on the benchmark 10-year Japanese government bond neared a two-month high on Monday, pressured by US Treasury losses and comments by Bank of Japan Governor Toshihiko Fukui, who said late last week that the possibility of a rate rise this year could not be ruled out.
JGBs were hit by broad selling, sending the lead futures contract to its lowest level since late August, after US Treasuries slipped on surprisingly strong US economic data, which reinforced the perception that the Federal Reserve may not lower interest rates in the near term.
"We cannot ignore influence from US Treasuries on JGBs," said Tetsuya Miura, a bond strategist at Shinko Securities. "Movements in US Treasuries have been having an impact on JGBs for so long," Miura said. "It's unlikely to change easily."
The market continued a sell-off from last week, which accelerated when Fukui said on Friday he could not rule out another interest rate rise this year. Most market participants expect the BoJ's next rate rise will be in the January-March quarter.
The 10-year yield rose 3.5 basis points to 1.795 percent, wiping out the entire drop to a six-month low of 1.6 percent in September and filling a gap that opened up on technical charts due to surprisingly soft Japanese consumer price data in late August.
That "CPI shock" had scaled back expectations for a BoJ rate rise, triggering a JGB rally. December futures slid 0.38 point to a seven-week low of 133.52. The five-year yield climbed 4.5 basis points to 1.275 percent, its highest in nearly two months.
The two-year yield was 4 basis points higher at 0.745 percent, also its highest in nearly two months. A 0.94 percent rise in the Nikkei share average was also helping to drive yields higher, analysts said. The Nikkei booked a five-month closing high on Monday. US Treasuries slipped on Friday thanks to strong figures on US retail sales and consumer sentiment, which showed that inflation risks remain and could keep the Fed from lowering interest rates for now.
Some analysts said that a surprisingly strong tankan survey of domestic business sentiment released on October 2 and increasingly hawkish comments by BoJ officials were souring demand for bonds, both from domestic and overseas investors.
BoJ Deputy Governor Toshiro Muto said earlier this month that the central bank did not have a preset idea on when to next raise rates after lifting them from zero in July.
Some investors took this to mean the BoJ might raise rates before the end of December. "Sentiment has been changing gradually since the BoJ's tankan poll and Muto's comments, as well as the sell-off in the United States, and more investors are looking for a good time to sell JGBs," said Tatsuo Ichikawa, a JGB strategist at ABN Amro.
Buying interest for longer-dated maturities remained healthy, even before a 600 billion yen ($5 billion) auction of 30-year bonds on Tuesday, which some in the market said was a signal that the yield curve would continue to flatten.
Despite selling in other maturities, the 30-year yield was unchanged at 2.505 percent, shrinking the spread between 30- and 10-year maturities to 71 basis points from 78.5 basis points earlier in the month.
Given Monday's levels, the new 30-year issue was widely expected to come with a 2.5 percent coupon, which would match those offered on the previous two issues and was expected to attract adequate buying demand.
In the short-term money market, three-month euroyen futures for March delivery hovered around their lowest level in more than a month. The contract was down 2 basis points at 99.285, indicating a three-month interbank rate of 0.715 percent by March versus 0.4380 percent now.
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