Japanese government bond prices fell on Monday after strong data on corporate spending, while investors also turned cautious ahead of a 10-year bond auction and a news conference by Bank of Japan Governor Toshihiko Fukui later in the week.
JGB futures hit a six-month high on Friday in the wake of soft consumer price data and a weak industrial output report that reinforced expectations the BoJ will not raise interest rates again this year. Investors started selling to book profits, traders said. "It's not unusual to see adjustments before an auction, though a bit more selling emerged today as prices had risen so much," said a trader at a European brokerage.
"Overall, sentiment remains the same, with many still betting the BoJ will not boost rates again this year," the trader said. Market participants were also hesitant about chasing prices higher ahead of the news conference by Fukui on Friday after the central bank ends a two-day policy board meeting, traders said.
While the market expects the BoJ to leave the key overnight call rate on hold this week, investors will focus on what Fukui has to say about the softer-than-expected July consumer price data released on August 25.
"Investors will find it difficult to buy bonds aggressively until Fukui's news conference," said Makoto Yamashita, chief JGB strategist at Lehman Brothers. September 10-year JGB futures fell 0.26 point to 134.63 moving away from a six-month high of 135.20.
The yield on the benchmark 10-year JGB rose 3.5 basis points to 1.675 percent. The yield fell as low as 1.6 percent on Friday, its lowest level since March. The Finance Ministry will offer 1.9 trillion yen ($16.29 billion) of 10-year JGBs on Tuesday. The coupon on the new issue is expected to be set at 1.7 percent, below the 1.9 percent offered in August and the lowest coupon since the start of this financial year in April.
"It's quite possible that some investors will say that a 1.7 percent coupon is too low, especially after the BoJ rate hike in July," said the trader at a European brokerage. In its first rate increase in six years, the BoJ raised its overnight call rate to 0.25 percent from near zero in July. The five-year yield was up 4 basis points at 1.130 percent. The sector had gained the most after the so-called "CPI shock" in late August. The 20-year yield climbed 2.5 basis points to 2.150 percent.
Data released by the MoF on Monday showed that Japanese companies increased spending on plant and equipment by a stronger-than-expected 16.6 percent in the April-June quarter compared with a year earlier. Traders said the capital spending data weighed on bond prices, while it helped the Nikkei average to climb 1.39 percent.
"After the CPI shock, the hurdle for the BoJ to carry out another interest rate hike this year has become quite high," said Naoki Iizuka, chief economist at Dai-ichi Life Research Institute. "But with the MoF data confirming strength in capital spending, there is still a chance for another rate hike this year depending on the pace of capital spending growth ahead," Iizuka added.
BoJ officials are wary of any overheating in capital spending. March three-month euroyen futures fell 0.040 point to 99.315 indicating a rate of 0.685 percent by that time compared with around 0.43 percent now.