Japanese government bonds slipped on Tuesday, pressured by U.S. Treasuries and weaker-than-expected demand at a 10-year JGB sale.
The benchmark 10-year cash JGB yield added one basis point to 0.045 percent. The 10-year JGB futures contract finished down 0.06 point to close at 150.87, paring losses after dipping as low as 150.75 in afternoon trading.
The two-year JGB yield rose 1.5 basis points to minus 0.135 percent, and the 5-year JGB yield also gained 1.5 basis points to minus 0.100 percent.
“The short end of the curve is especially weak,” said Tadashi Matsukawa, head of fixed income investment in Tokyo at PineBridge Investments.
“Investors might be starting to price in the eventual BOJ exit move year, as the two- and five-year sectors are ridiculously negative and eventually have to turn positive,” he added.
While an exit is not on the near-term horizon, the Bank of Japan has been hinting it could edge away from stimulus earlier than many had expected, through a future hike in its yield target.
Superlong JGBs fared better, Matsukawa said, as dip-buying underpinned the 20-year sector, and dealer hedging propped up the 30-year zone.
The 20-year yield added one basis point to 0.585 percent , while the 30-year yield rose half a basis point to 0.840 percent.
The Ministry of Finance’s sale of 2.3 trillion yen ($20.45 billion) of 10-year JGBs with a 0.10 percent coupon produced a lowest price of 100.3500, with 88.8083 percent of the bids accepted at that price.
The sale drew bids of 3.70 times the amount offered, down from the previous sale’s bid-to-cover ratio of 4.55 times, suggesting weaker demand for the notes.
U.S. Treasuries also put upward pressure on JGB yields. The benchmark 10-year Treasury yield drifted up to 2.390 percent from 2.385 percent in late trading on Monday.
Treasury yields dropped overnight but remained above their levels at the end of last week, after the U.S. Senate passed a tax reform bill early on Saturday.
That raised expectations that the U.S. Congress would enact the tax cut legislation as early as this year, if the Senate is able to reconcile its version of the bill with legislation passed by the House of Representatives and get the bill to U.S. President Donald Trump to sign.
BOJ Governor Haruhiko Kuroda met with Prime Minister Shinzo Abe on Tuesday, and told him that global economic conditions were solid.
Kuroda said they did not discuss who would head the central bank when his term expires in April next year.
Speaking in the parliament on Tuesday, Kuroda said he was closely watching the government bond market in guiding the yield curve control policy and that he saw no distortion in the market at present.