Japanese government bond futures edged up on Tuesday as a drop in Tokyo shares gave safe-haven debt a lift, but activity was quiet as investors waited for the US markets to reopen after a long weekend. Investors were cautious about buying JGBs before US markets reopen, with a raft of US Treasury auctions of two-, five- and seven-year notes this week totalling $101 billion giving them an additional reason to stick to the sidelines.
JGB futures extended their gains briefly after the finance ministry's 20-year JGB auction drew solid demand, but futures soon retreated. "The auction results did not lift the market much, which means there are probably investors who want to wait to see how the US Treasury market will perform," said Makoto Yamashita, strategist at Deutsche Securities.
"The 20-year JGB yield at 2.1 percent drew demand from dealers who wanted to cover their short-positions, but they want to check the US yield moves," he said. The Ministry of Finance's 900 billion yen ($9.5 billion) of 20-year notes drew bids worth 3.52 times that amount, up from 2.60 at the previous tender for the same maturity in April and the highest since October 2008 auction.
The tail - the difference between the lowest and the average price - narrowed to 0.04 from 0.10 last month and the lowest since the February 2009 auction. Bonds were offered as a re-opening of the same maturity sold last month.
June 10-year futures rose as high as 136.93 soon after the auction results. Futures later retreated to 136.82 but were up 0.09 point on the day, while the Nikkei share average fell 0.4 percent. The 20-year yield was down 2 basis points to 2.105 percent.
North Korea fired two short-range missiles on Tuesday off its east coast, Yonhap news agency quoted a South Korean government source as saying, a day after the reclusive state tested its second nuclear device and fired off three short-range missiles.
"While the reaction of the yen and stocks to news about North Korea could have had a potential impact on JGBs, the bond market has so remains largely driven by expectations on demand and supply issues," said Katsutoshi Inadome, a fixed-income strategist for Mitsubishi UFJ Securities. The benchmark 10-year yield was flat at 1.445 percent.
The five-year yield was steady at 0.805 percent. The two-year yield was also flat at 0.355 percent, remaining near a three-year low of 0.340 percent touched on Friday. Japanese banks have shifted funds to shorter-dated notes following the Bank of Japan's move to inject more cash through its asset buying programme, causing the recent decline in the yields of shorter-dated JGBs, analysts said.
The spread between the two- and 20-year yields widened to a three-year high of 177 basis points on Friday and has since stayed near that level. After the 20-year JGB auction, investors are looking ahead to a slew of Japanese economic data such as April trade figures on Wednesday and industrial production numbers on Friday.
"As there have been some signs that the economy has hit the bottom, investors will look to see whether coming data support that view," said Jun Fukashiro, chief fund manager at Toyota Asset Management. "The JGB futures may be lifted if the data show positive figures but cash bonds are unlikely to rise much because the data would not prove the economy is recovery but only show a halt in it faltering," he said.