Japanese government bonds fell on Monday, with the 10-year yield touching a fresh 2-1/2 month high, as supply worries continued to weigh on the market and after US Treasuries retreated on aggravated concerns that the Federal Reserve may depart from its low interest rate policy earlier than anticipated.
A 0.8 percent bounce by Tokyo's Nikkei stock average to a four-week closing high also added to pressure on JGB prices. December 10-year JGB futures lost 0.32 point to 137.99 after hitting 137.93, their lowest since August 14. "Weaker Treasuries provided much of the incentive for JGBs to turn lower. Supply concerns are nothing new but they are hovering in the background," said Katsutoshi Inadome, a fixed-income strategist at Mitsubishi UFJ Securities.
Midterm JGBs, which had been relatively immune to the sell off that hit longer maturity debt this month, bore the brunt of selling on Monday. Midterm JGBs were hit by the slip in bond futures, dealers said, adding that some speculators were beginning to build short positions in futures after liquidating their long positions. The five-year yield climbed 3 basis points to 0.685 percent after hitting a four-year low of 0.555 percent at the beginning of the month.
Market players said big domestic banks, who were large net buyers of midterm JGBs last month, were sellers of the paper, while their smaller counterparts emerged to buy on price dips. "Five-year JGBs are exposed to selling as they still appear expensive on the yield curve compared to other maturities. They are also being hit by the fall in futures," said Shinji Ebihara, a quantitative analyst at Mizuho Securities.
The five-year/20-year yield spread widened by 0.5 basis point to 146 basis points on Monday but was still below a four-year high of around 150 basis points hit last week according to data. The benchmark 10-year yield rose 3 basis points to 1.390 percent, after hitting 1.395 percent, its highest since mid-August. The 20-year yield gained 3.5 basis points to 2.145 percent. Concerns over increased supply have been weighing on the market.
The Ministry of Finance held a regular meeting with JGB primary dealers on Friday and discussed reallocating about 2.6 trillion yen ($28.2 billion) of debt initially intended to be sold as retail JGBs, floating-rate bonds and inflation-linked debt to the market in the form of one-, two-, five- and 10-year bonds.
The MOF had aimed to sell a total 4.2 trillion yen of JGBs to retail investors in the fiscal year to March 2010, but said on Friday it expected the figure to be around 2 trillion yen below that due to poor demand. The MOF and primary dealers also discussed reallocating 600 billion yen of issuance initially intended to be sold as floating-rate and inflation-linked JGBs into fixed-rate maturities. Bond investors are also bracing for the government to increase new JGB issuance this fiscal year to fill an expected tax revenue shortfall.
Japan has already increased planned new JGB issuance to 44.1 trillion yen from 33.2 trillion yen but the market is eyeing that to rise to about 50 trillion yen. US Treasuries fell on Friday, hit by a September surge in existing US home sales and by a Financial Times article highlighting discomfort among some Federal Reserve officials over interest rates remaining low "for an extended period."