The benchmark 10-year Japanese government bond yield fell to a four-month low on Monday as a slide in Tokyo share prices and worries about global growth spurred demand for the safety of government debt.
JGB futures rose to their highest level in four months while the two-year yield, which is the most sensitive to interest rate changes, fell below 0.75 percent to reflect market expectations that the Bank of Japan will not hike rates anytime soon.
Selling before Tuesday's key 10-year JGB auction weighed on prices earlier in the session, but once such hedge selling came full circle, market players turned their attention back to economic growth worries, traders said.
"Concerns about the 10-year sale weighed on sentiment earlier in the day, but as views emerged that the auction will likely be met with decent demand, prices recovered because it's hard to find reasons for yields to climb," said a portfolio manager at a Japanese asset management firm.
"Not only JGBs and US Treasuries, but yields on euro zone government bonds are also falling, so investors are focusing on global economic deterioration and think it's alright to buy bonds at current market levels," he said. September 10-year JGB futures ended at their day-session high of 137.01 up 0.29 point on the day and at their highest since late April. Volume picked up to 34,503 lots, after hovering well below 30,000 contracts all last week.
The 10-year JGB yield fell 1.5 basis points to 1.495 percent its lowest since late April, slipping from the day's high of 1.540 percent. The two-year yield eased 2 basis points to 0.740 percent a three-month low. The two-year yield fell below the BoJ's 0.75 percent Lombard rate for direct lending to banks, showing there was no market expectation for a rate hike by the BoJ anytime soon.
The Ministry of Finance plans to offer 1.9 trillion yen ($17.67 billion) in 10-year JGBs on Tuesday. At current levels, the coupon could be set at 1.5 percent, down from 1.7 percent at last month's auction of the maturity, but traders expect the auction to draw decent demand.