TOKYO: Japanese government bond prices mostly gained on Monday and the yield curve flattened as expectations the Bank of Japan will step up buying in longer maturities overwhelmed an increase in risk appetites following a bailout deal for Cyprus.
Analysts also noted domestic pension funds were buying so-called super-long bonds, such as 20- and 30-year bonds, for portfolio rebalancing after a Japanese stock market rally in the past few months lifted the value of their share portfolios.
"Progress in Cyprus was negative for JGBs. But strong buying in superlong bonds supported the market," said Katsutoshi Inadome, fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.
The yield on the 30-year bonds fell 3.0 basis points to 1.595 percent, its lowest level since August 2010, and edging towards a low of 1.535 percent reached then.
The 20-year yield fell 2.0 basis points to 1.465 percent , coming close to a 10-year low of 1.450 percent hit earlier this month.
The benchmark 10-year yield was flat at 0.560 percent , as the strength in the super-long sector helped to offset the initial losses triggered by the news on Cyprus.
The 10-year JGB futures price dipped 0.03 point to 145.70, still near their record high of 145.75 hit on Friday.
Cyprus clinched a last-ditch deal with international lenders on Monday for a bailout that will shut down its second largest bank and inflict heavy losses on uninsured depositors, boosting the euro and share prices.
Expectations that new BoJ Governor Haruhiko Kuroda will unveil aggressive bond buying at his first policy meeting on April 3-4, or the next one in late April at the latest, have underpinned JGBs in the past few weeks.
"It seems like Kuroda wants to buy about two trillion yen more of assets per month," said a senior trader at a major Japanese bank. "If so, there's nothing else to buy other than bonds considering that the entire markets of REITs (real estate investment trusts) and ETFs (exchange-traded funds) are about 4 to five trillion yen each."
In addition, many Japanese investors, such as pension funds, have been buying bonds in recent weeks to rebalance their portfolio by their financial year-end on March 31.
But some analysts also say such buying will likely disappear after the new financial year begins, pointing to risk of a setback in the market as yields for investors are painfully low, especially at the shorter end of the curve.
The benchmark five-year bonds, which were untraded on Monday, closed at yield of 0.120 percent on Friday, near record low of 0.10 percent.
"There's no point buying five-year bonds. In the new financial year, some investors will look to foreign bonds as an alternative," said Tohru Yamamoto, chief fixed income strategist at Daiwa Securities.
Foreign investors may be even less eager to buy JGBs.
BoJ data showed on Monday that foreign ownership of JGBs fell during October-December, suggesting overseas investors may be hesitant to further increase debt purchases as the yen weakens.