Japanese government bonds fell on Monday, with futures retreating from five-month highs hit the previous week, hurt by a sharp fall in US Treasuries and a 3.4 percent surge for Tokyo's Nikkei stock average. The bond market also felt selling pressure from dealers lightening their books ahead of a 1.1 trillion yen ($11.6 billion) 20-year JGB auction on Tuesday.
September 10-year futures fell 0.29 point to 138.91 after hitting 139.36 on Friday, their highest since late March. JGB losses were relatively limited, however, as the market was supported by expectations that ample investor demand would help prop it up for the short term.
Factors being eyed to support JGBs include duration extensions by index-following investors toward the month's end and hopes that bond holders would reinvest much of their money when about 10 trillion yen of government debt mature next month. "Investor bids were quite strong, which capped bond yields," said Shinji Ebihara, a quantitative analyst at Mizuho Securities.
Analysts said demand from investors eyeing to extend the duration of their JGB holdings could help the 20-year auction proceed smoothly but added decent tender results alone were unlikely to change the market's direction ahead of Japan's closely watched general election on August 30. Japan's opposition Democratic Party is heavily favoured to win the election and oust the ruling Liberal Democratic Party for only the second time since its founding in 1955.
Bond investors see a win by the opposition Democrats as slightly less market friendly as many investors believe the party's spending plans could potentially inflate Japan's already huge public debt. JGBs showed limited immediate response to reports that Yukio Hatoyama, the leader of the Democrats, vowed at the weekend not to increase government debt issuance for the fiscal year that starts in April 2010 if his party takes power.
"Hatoyama gave himself a wide margin as his pledge is against 44 trillion yen of debt issued this fiscal year, which already includes extra spending from a supplementary budget," said Hidenori Suezawa, chief fixed-income strategist at Daiwa Securities SMBC. The two- to 20-year spread widened 1 basis point to 185.5 basis points ahead of the 20-year sale.
The 20-year yield rose 1.5 basis points to 2.100 percent and the 10-year yield climbed 1.5 basis points to 1.320 percent after falling to a one-month low of 1.300 percent on Friday. The five-yield rose 1 basis point to 0.635 percent and the two-year yield edged up 0.5 basis point to 0.245 percent.
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