Japanese government bonds tumbled on Monday, pushing the benchmark 10-year yield up from a four-month low, as market players shed holdings to make room in their portfolios before a debt auction. The market was also hit as speculators took short positions and dealers sold bonds to lighten their books before Tuesday's 1.9 trillion yen ($17.6 billion) 10-year debt auction, traders said.
With the jump in yields likely leading to a 1.5 percent coupon rather than a 1.4 percent one, analysts said demand for the offering should be good. JGBs have climbed as the economy has lost steam. But gains petered out last week after Bank of Japan officials made clear the next move on policy is likely to be a hike in interest rates, even while sticking to a neutral policy stance. The BOJ has kept rates on hold at 0.5 percent for a year and a half.
"There's no reason or new factors behind the bond sell-off besides Tuesday's 10-year auction," said a bond trader at a European brokerage. "It's mostly technical, and bargain-hunting is likely to prevent a further slide."
Traders said domestic investors were picking up bonds on the drop, limiting losses, even as the market failed to get much of a boost from a drop in stocks. The Nikkei average lost 1.8 percent. September futures dropped 0.75 point to 137.62, down more than a point from a four-month peak of 138.80 in last Tuesday's evening session.
A trader at a European bank said the fall beneath 138 in futures triggered selling by players such as CTAs (commodity trading advisers) and exacerbated the size of the move. "It's all technical," said the trader. The benchmark 10-year yield climbed 6.5 basis points to 1.470 percent.
The two-year yield edged up 2 basis points to 0.735 percent while the five-year yield jumped 6 basis points to 1.030 percent. Some investors booked profits on Monday, believing yields had fallen about as far as they could with the BOJ on hold.
JGBs rose late last week as institutional investors scooped up long-term bonds to match changes in the benchmark performance index, the Nomura BPI, before the month-end. Such buying needs were bigger than usual because a large amount of JGBs mature in September.
The market showed a muted reaction to government plans to spend about $16.5 billion extra this year to ease the pain for businesses and consumers from rising oil and food prices. That was because Prime Minister Yasuo Fukuda said on Friday the government did not plan to issue extra government bonds to finance the steps.
Before the economic measures were announced on Friday, investors had been concerned the government might issue more debt to fund the package, potentially hurting the JGB market. "The market shrugged off the economic package," said Makoto Yamashita, chief JGB strategist at Lehman Brothers. Many analysts and investors doubt the package will stimulate the economy because its size is exaggerated by the expansion of government guarantees on loans to small firms and it includes few steps to boost consumption.