Japanese government bonds slid on Monday, following a sell-off in Treasuries late last week when smaller-than-forecast US job losses ignited fears the Federal Reserve might raise interest rates sooner than expected. The lead June JGB futures contract was also dragged down by technical trading ahead of its last trading day on Thursday.
US short-term interest rate futures, which track market expectations on Fed rate policy, made their first meaningful move in months - advancing the possible timing of the first Fed rate hike to late 2009 from early 2010. Shorter-dated JGBs suffered more than other maturities after the change in the US rate outlook prompted the two-year US Treasury yield to post its biggest one-day jump since September.
But overall JGB market declines were limited as most participants still think the Bank of Japan will keep interest rates at the current 0.10 percent for some time. "JGBs took a hit as a better-than-forecast headline figure in the US jobs data sparked bear-flattening in Treasury yields and a rally in share prices," said Makoto Yamashita, chief Japan interest rate strategist at Deutsche Securities.
June 10-year JGB futures fell 0.40 point to 136.44, back in sight of a seven-month low of 136.02 struck in late May. The benchmark 10-year JGB yield climbed 2.5 basis points to 1.515 percent, crawling towards a seven-month high of 1.550 percent hit last week.
The Nikkei share average posted an eight-month closing high. The two-year yield rose 3.5 basis points to 0.375 percent, while the five-year yield jumped 4.5 basis points to 0.835 percent. Traders said the rise in shorter-dated yields was due to profit-taking on positions betting on a steepening in the yield curve and had little to do with BOJ monetary policy expectations.
"People rushed to unwind curve-steepening trades as the abrupt flattening in the US yield curve was something they had not expected," said Tetsuya Miura, chief market analyst at Mizuho Securities. "No one expects the BOJ to raise rates soon. But many are nervous about taking too much risk," Miura said.
The 20-year yield edged up 1 basis point to 2.150 percent. The yield curve flattened as a result. The yield spread between two- and 20-year JGBs stood at 177.5 basis points. It had widened to as much as 183 basis points last week, the widest in 3-1/2 years.
The yield curve has steepened in recent months as longer-dated yields rose on concerns about a spike in JGB issuance from July to finance government stimulus measures, while shorter-dated yields have stayed low on the back of BOJ rate expectations. The 30-year yield inched up 1 basis point to 2.270 percent before the Ministry of Finance's 500 billion yen ($5.1 billion) auction of the maturity on Tuesday.