Japanese government bonds rose on Wednesday, taking cues from a rally in US Treasuries and Tokyo stocks dropping from a 15-month high in the wake of a surprise move towards tighter monetary policy in China. March 10-year JGB futures climbed 0.28 point to 139.11, pulling away from a two-month low of 138.56 struck last week.
Tokyo's Nikkei stock average shed 1.3 percent after China started tightening monetary policy by increasing banks' required reserves. The news took markets by surprise, raising fears that Chinese tightening could dampen the global economic recovery. JGB gains were limited ahead of a string of upcoming bond sales. Japan's Ministry of Finance will offer 40-year debt on Thursday and five- and 20-year paper next week.
Market players expect Thursday's 300 billion yen ($3.3 billion) 40-year auction to proceed relatively smoothly given demand from investors such as life insurers that are looking for assets to match their long-term liabilities. The 20-year yield dropped 1.5 basis points to 2.135 percent. The 30-year yield was also down 1.5 basis points at 2.295 percent. The benchmark 10-year yield fell 2 basis points to 1.330 percent after hitting a two-month high of 1.365 percent last week.
The five-year yield fell 1 basis point to 0.500 percent and the two-year yield dipped 0.5 basis point to 0.160 percent. The two-year/10-year yield spread tightened by 1.5 basis points to 117 basis points after reaching a two-month high of 119.5 basis points last week.
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