Japanese government bond prices dipped on Monday as traders sold 10-year cash bonds ahead of a government offer of that maturity and as a rise in Tokyo share prices lured investors away from bonds.
The Ministry of Finance is offering 1.9 trillion yen ($17 billion) of 10-year bonds on Tuesday. Given the level of cash bond yields, the coupon could be raised to 2.0 percent from 1.8 percent at last month's 10-year JGB sale, traders said. A 2.0 percent 10-year coupon would be the highest since a January 1999 issue, when it was also 2.0 percent. Even at 1.9 percent, it would be the highest since the 10-year JGBs issued in August 2004.
"The market wants to avoid a 1.9 percent coupon on the offer tomorrow so it's likely to push up cash bond yields a little bit higher," said Osamu Tamada, assistant research manager at Mizuho Investors Securities.
Traders said many investors were cautious after JGB prices tumbled continuously in the first three months of this year on growing expectations that the Bank of Japan is ready to raise interest rates from zero.
Growing signs of an end to deflation and perceptions that Japan's economy has climbed out of a decade of malaise are driving expectations of BOJ rate rises.
"The uncertainty about the timing of a BOJ rate hike prompted players to look at stocks, yen and other external factors to trade on, while buying JGBs on dips," said Takafumi Yamawaki, Morgan Stanley's fixed income strategist.
The benchmark 10-year JGB yield rose 5.5 basis points to 1.970 percent, inching closer to the seven-year high of 2.00 percent hit in mid-April.
The 20-year yield climbed 4.5 basis points to 2.270 percent. The five-year yield rose 3.5 basis points to 1.365 percent. The two-year yield was up 1.5 basis points at 0.670 percent.
Key June 10-year JGB futures ended the day session down 0.40 point at 132.34. Japanese financial markets were closed from Wednesday to Friday last week for the country's Golden Week holidays. A rise in the yen against the dollar is considered to have the potential to boost JGBs. But the currency's recent gain has not yet produced any visible effects on the bond market.
The yen rose to an eight-month high around 111.60 yen per dollar on Monday after a top US Treasury official suggested that Japanese policymakers should refrain from intervening verbally on currencies.
The yen's rise, if it continues at its recent rapid pace, could fuel speculation that it would affect the BOJ's rate decision, Morgan Stanley's Yamawaki said.
But JGBs will remain top-heavy as long as Japanese share price are resilient to currency movements, he added.