Japanese government bond prices trimmed earlier losses as Tokyo shares reversed course and fell on Monday, but caution ahead of a two-year auction kept a cap on bond prices.
The Ministry of Finance will offer 1.7 trillion yen ($15 billion) of two-year JGBs on Tuesday which look set to come with the highest coupon since 1997.
Securities firms are expected to remain wary of stocking up too much on short-term JGBs amid expectations the Bank of Japan will raise interest rates as early as July, traders said.
At the same time, the BoJ's same-day funding operation earlier in the session aimed at stemming a sharp rise in the unsecured overnight call money market could prompt some investors to buy two-year bonds.
"The BoJ's operation offered some solace to investors who were feeling jittery about rising money market rates," said Naomi Hasegawa, a senior JGB strategist at Mitsubishi UFJ Securities.
The yield on the benchmark 10-year cash bond rose 1.5 basis points to 1.865 percent, inching closer to a seven-year high of 2.005 percent touched earlier in the month.
The two-year yield fell half a basis point to 0.835 percent, moving away from 0.860 percent hit on Friday, its highest level in records dating back to 1998.
At current levels, the auction is expected to come with a coupon of 0.9 percent, which would match a coupon offered in July 1997, traders said. At current levels, the auction is expected to come with a coupon of 0.9 percent, which would be the highest since a 0.9 percent coupon offered in July 1997, traders said.