Japanese government bonds dipped on Monday, weighed down by supply concerns stemming from uncertainty about how much extra debt the government will have to issue to fund its spending programmes.
December 10-year futures fell 0.05 point to 138.83, unable to retain gains after rising to 138.99 in response to weaker Tokyo stocks and gains in US Treasuries. The contracts touched a three-week low of 138.78 on Friday.
"It is difficult for participants to react to potentially positive factors while supply concerns smoulder in the background," said Katsutoshi Inadome, a fixed-income strategist at Mitsubishi UFJ Securities. Prime Minister Yukio Hatoyama's cabinet last week presented record budget requests totalling more than 95 trillion yen ($1.05 trillion) for the fiscal year starting next April.
The government has said it wants to rein in bond issuance in 2010/11 to below the 44 trillion yen earmarked for the current fiscal year, but that goal looks increasingly difficult to achieve in the wake of likely tax revenue shortfalls.
Chief Cabinet Secretary Hirofumi Hirano told reporters on Monday that the government wanted to reduce the 2010/11 budget to below 92 trillion yen, but he drew little reaction from the bond market.
The JGB yield curve flattened a touch as 20- and 30-year bond yields defied the trend and were flat to a touch lower. Despite the worries over extra supply, superlongs still appear a bargain to some investors after sharp rises in yields the previous week, market players said. Japan's Ministry of Finance will offer 1.1 trillion yen ($12 billion) of 20-year JGBs on Tuesday.
The auction is seen as a test of investor demand at a time when supply concerns are dogging the market, and market participants awaited the tender with measured optimism.
The five-year yield edged up 1 basis point to 0.625 percent. The benchmark 10-year yield rose 1.5 basis points to 1.340 percent, its highest since mid-September. The 20-year yield dipped 0.5 basis point to 2.095 percent. It hit a three-month trough of 1.980 percent on October 8 before rising to a seven-week high of 2.100 percent on Friday.
The 30-year yield fell 1 basis point to 2.245 percent. The five-year/20-year yield spread was at 147 basis points from 148 basis points on Friday, its widest in four years according to Reuters data.