Japanese government bonds fell for the fourth straight session on Monday, hurt by a drop in US Treasuries, rising Tokyo shares and strong data reinforcing the view that the Bank of Japan could raise interest rates as early as August.
Japan's core private-sector machinery orders, a key gauge of corporate capital spending, rose 5.9 percent in May from the previous month, well above economists' consensus forecast for a 2.3 percent increase, following a 2.2 percent rise in April.
The BoJ is expected to hold rates steady at a two-day policy meeting on Wednesday and Thursday this week, but many in the market expect a rate hike in August, with a global monetary tightening trend lending support.
"The market sees the machinery orders as supporting the case for an August rate hike, as the figures show the economy is moving in line with the BoJ's outlook," said Naomi Hasegawa, a senior fixed income strategist at Mitsubishi UFJ Securities.
"Prices are also capped by the fall in US Treasuries on Friday and the rise in the Nikkei," she said. September 10-year JGB futures ended the day session down 0.14 point at 131.31 after falling to a three-week low of 131.18 earlier in the session.
The benchmark 10-year yield rose 1.5 basis points to 1.945 percent.
Yields on two- and five-year JGBs inched up 1 basis point each to 1.075 percent and 1.545 percent respectively. Swap contracts on the overnight call rate showed that markets see an 80 percent chance of the BoJ raising its policy target rate to a 12-year high of 0.75 percent in August, once Japan's upper house election on July 29 is out of the way.
The benchmark Nikkei share average ended the day up 0.7 percent at a seven-year closing high. Traders said that with prices falling, some investors were interested in buying bonds on dips, helping to limit losses. "Current market levels are spurring some investors to buy bonds at lower prices, helping lend support," said a senior dealer at a Japanese bank.
Caution before the Ministry of Finance's offer on Tuesday of 2.0 trillion yen ($16 billion) in five-year JGBs capped prices. Traders expected a coupon of 1.5 or 1.6 percent. If the coupon is set at 1.6 percent, it would be the highest since the maturity was introduced in 2000.
But coupon levels aside, investor demand is likely to be lukewarm for the five-year sector, which is vulnerable at a time when interest rates are on the rise, the senior dealer said. For this week's policy meeting, the market focus will be on whether the BoJ board's policy vote is unanimous or split.