Japanese government bonds edged up on Monday on a retreat in Tokyo shares and a rise in US Treasuries late last week, but the market wrapped up a brutal start to the fiscal year dominated by a hefty sell-off. Benchmark 10-year yields hit a six-week low as the Nikkei share average gave up initial gains and fell 0.5 percent.
Despite the bond market's rebound, the 10-year JGB suffered its worst quarter in four years on heavy selling by foreign investors and big Japanese banks sparked by worries about inflation and potential Bank of Japan interest rate hikes.
Market players are now awaiting the BoJ's quarterly tankan survey of business sentiment on Tuesday to see how much the surge in oil and commodity prices has hurt confidence and the capital spending plans at big companies.
In a Reuters poll, the headline tankan index of sentiment at big manufacturers is forecast to fall to plus 3, its lowest in five years. But capital spending plans for the current fiscal year are expected to be upgraded to show an increase of 2.0 percent compared with a cut of 1.6 percent in the March survey.
Kenro Kawano, senior interest-rate strategist at Credit Suisse, said the tankan survey should highlight the conflicting factors confronting investors: deteriorating confidence in the economy but worsening inflation pressures as well.
Data on Friday showed Japanese core consumer prices, which exclude fresh food prices but include energy, accelerating to a decade-high of 1.5 percent in May. "This is an unclear situation that many investors have not seen in a while, so volatility should remain high," said Kawano. September 10-year futures climbed 0.22 point to 135.45 in light trade of 24,729 lots, about 40 percent below the daily average this year.
The benchmark 10-year yield dipped 2 basis points to 1.590 percent and hit a six-week low of 1.585 percent. But for the April-June quarter, the first of Japan's fiscal year, 10-year yields are still up 31.5 basis points - the biggest quarterly rise in four years.
The five-year yield dipped a basis point to 1.170 percent, near a six-week low of 1.155 percent hit on Friday. The 20-year yield edged down half a basis point to 2.170 percent. Traders said month-end and quarter-end buying by pension funds and other institutional investors likely boosted super-long bonds.
The yield curve between five- and 20-year yields steepened half a basis point to 100 basis points, adding to a 3-basis point steepening last week. Analysts said an upgrade of JGBs by Moody's to Aa3 from A1 would have little impact on the market.
"The resilience of the economy, one of the factors behind the upgrade, has been in place for several years. Moody's also commended the government's fiscal stance, but the government has not announced any specific plans about how it will reduce spending," said Chotaro Morita, chief fixed-income strategist at Barclays Capital.
JGBs have powered back as global stocks have retreated on new worries about the health of major financial institutions and doubts have cropped up over how quickly the BoJ could raise rates.
The worries about the US economy, along with concerns about how much more in asset write-downs US banks could report in quarterly earnings next month, have spooked investors and pushed investors into safe-haven bonds. US stocks retreated further on Friday, briefly pushing the Dow Jones industrial average into bear-market territory, as oil vaulted to record peaks near $143 a barrel and data showed consumer sentiment hitting a 28-year low.