Japanese government bond futures slipped on Monday as participants trimmed their positions on a rise in Tokyo shares and ahead of an upcoming 30-year debt auction. Midterm JGBs held relatively firm, as bargain hunting from banks flush with cash prevented yields from rising sharply.
The Ministry of Finance will sell 600 billion yen ($6.4 billion) of 30-year JGBs on Tuesday, and participants expect strong underlying demand from insurers to help the market digest the supply. The auction is taking place after the 30-year yield recently declined to a four-month low, helping the curve to flatten, on demand at the start of the fiscal year that began on April 1 from domestic investors such as pension funds and life insurers.
"Concern about the auction is limited as actual investor demand has driven superlong yields down to these levels so far," said Makoto Yamashita, chief Japan interest rate strategist at Deutsche Securities. "But the superlong rally we have seen this fiscal year may begin tapering off as the market will need time to digest the 30-year bonds."
The 30-year yield rose 1 basis point to 2.225 percent after hitting a four-month low of 2.200 percent on Friday. The benchmark 10-year yield climbed 1.5 basis points to 1.395 percent. The five-year yield rose 1 basis point to 0.550 percent. June 10-year futures fell 0.17 point to 138.23. "Futures slipped as short-term investors cut long positions in response to higher stocks," said a dealer at a domestic bank.
The yield curve took a convex shape on Monday with the 10-year yield rising more than those of its surrounding maturities. Market players said some actively managed pension funds have recently been selling long-end JGBs - like seven- to 10-year paper - and buying superlong and short-end debt to reduce the interest rate risk that some parts of their portfolios are exposed to.
The 10-year/30-year yield spread stood at 83 basis points, matching a five-month low touched the previous week. The BoJ's upbeat assessment of the economy has dented expectations for further easing and seven- to 10-year maturities could become relatively more volatile as they are traded more actively, analysts say.