Japanese government bond futures hit an 11-month low as the lead contract changed during the session on Monday, on lingering worries over a Bank of Japan interest rate hike in coming months. A fall in US Treasuries in Asian trade after a rebound on Friday also depressed sentiment, prompting JGBs to give up earlier gains.
JGBs had been sold for the last three weeks on a rapid rise in overseas yields triggered by expectations for solid global growth and tighter monetary policies to ward off price pressure, compounding concerns of a Bank of Japan interest rate hike as soon as August.
US Treasuries resumed their sell-off on diminishing expectations that the Federal Reserve would cut rates later this year and benchmark yields were jumping towards five-year highs hit on Friday.
Bond investors reacted little to revised data showing the Japanese economy grew faster in January-March than initially reported as a stronger figure had been factored in and did not alter expectations for a BOJ rate hike.
"Foreign players are still not done with selling, and Japanese banks are also wanting to unload long-term JGB bonds as the timing for a rate hike seen in August nears," said Maki Shimizu, a strategist at UBS in Tokyo.
Shimizu also said institutional investors were hesitant to pick up bonds as yields were rising far more quickly than expected, leaving few buyers but sellers in the market.
There was a changeover in the lead JGB futures contract to September from June in early trade. The new benchmark September futures edged down 0.08 point to 131.47 after falling as low as 131.37, a fresh 11-month low for a lead contract. The benchmark 10-year yield was up 1 basis points at 1.900 percent, hovering near the 10-month high of 1.920 percent struck the previous session.
A Reuters poll showed late last week that many top Japanese life insurers expect the BOJ to raise interest rates twice this fiscal year ending in March 2008, with some seeing 10-year yields at 1.9 percent as attractive to buy.
The Ministry of Finance will sell 2 trillion yen ($16.4 billion) of five-year JGBs on Tuesday. Given the current level of five-year yields, traders expect the coupon to be set at 1.5 percent, the highest since a 1.5 percent coupon on the July 2006 issue.
The market sees the auction as an important test of demand after bond sell-offs in the past three weeks. "The focus in the auction is how much banks, the biggest players in the midterm sector, pick up the new notes, while other investors are expected to buy after a recent rapid rise in bond yields," said a senior trader at a European securities house. "The market is likely to rebound if the auction attracts good demand," the trader said. "It is likely to fall further if the results are lukewarm."