Japanese government bonds advanced on Monday, with the benchmark 10-year yield hitting a fresh four-month low as persistent concerns about the domestic and overseas economies overshadowed solid gains in Tokyo shares.
Cash yields in the superlong-sector extended their drops to new four-month lows on concern over the strength of the economy, while many investors remained doubtful about a Bank of Japan rate cut and kept shorter sector yields from falling further.
"The worsening economic prospects, especially for the domestic economy, are persistently strong," said Atsushi Ito, a fixed-income strategist at Morgan Stanley. "That is obvious from the absence of profit-taking when the 10-year yield declined below 1.5 percent. Some investors are likely taking advantage of the holiday-thinned market to shop while they can," said Ito.
This week marks Japan's "obon" holidays, when many people return to their hometowns on vacation. The 10-year yield edged down 1.5 basis points to 1.455 percent touching a new four-month low. September 10-year futures ended the day session flat from Friday's close at 137.68, after hovering in and out of positive territory near a four-month peak of 137.87 reached earlier.
A 2 percent jump in the Nikkei share average and Friday's retreat in Treasuries put pressure on bonds, but not enough to prevent traders from pushing yields down further. "Some market players had unloaded long positions in the debt since Friday, but they have nowhere else to shift funds to except to put them back into JGBs," said a senior dealer at a Japanese bank.
"Given there is no realistic prospect for a BoJ rate cut for now, bad news about domestic and overseas economies will encourage investors to buy longer sector bonds more than shorter sector notes," the dealer said. The 20-year yield fell 3 basis points to 2.065 percent, a new four-month low. The 30-year yield dropped 3.5 basis points to 2.270 percent, the lowest since late March.
JGBs have gained as growth concerns were pushed to the fore by last week's remarks by the European Central Bank acknowledging that euro zone economies were slowing more than expected, and suggestions Australian monetary authorities could be cutting rates.

Japan's April-June gross domestic product data on Wednesday will give markets a chance to gauge the strength of the economy. In contrast with longer-dated maturities, the short- to mid-term JGB sectors sagged after the Ministry of Finance announced at the end of last week that it would halve issuance of unpopular 15-year floating rate bonds and increase that of two-year JGBs and one-year treasury bills instead.
The MoF will cut issuance of "floaters" to a total of 1.2 trillion yen ($10.9 billion) this fiscal year, down from an initially planned 2.4 trillion yen. In an interview with Reuters, the ministry suggested it was open to more cuts in floater issuance. The ministry will also increase the monthly offer amount of two-year JGBs to 1.8 trillion yen in the October-March period from 1.7 trillion yen each month in the first half.
The decision to concentrate issuance increases at the short end of the yield curve was a surprise to analysts, many of whom had expected an increase in JGBs in the super long-end, where demand from investors such as life insurers has been persistently strong.
"The MoF probably concluded that increased issuance in the shorter-dated maturities would be absorbed smoothly, especially with prospects of a Bank of Japan rate hike diminishing," said Katsutoshi Inadome, a fixed-income strategist at Mitsubishi UFJ Securities. The two-year yield rose half a basis point to 0.700 percent while the five-year yield climbed 1.5 basis points to 1.025 percent.