TOKYO, May 21 (Reuters) - Japanese government bond prices fell on Monday, as investors took profits following the benchmark yield's drop last week to its lowest level in nearly nine years, although remaining concerns about Europe's debt situation limited the fall in prices.
JGBs were in favour among investors last week as escalating worries about Europe drove them towards the relative safety of these securities.
The 10-year bond yield gained 2.0 basis points to 0.845 percent, after dropping to as low as 0.815 percent on Friday. That was its lowest since July 2003.
The front-month 10-year JGB futures contract ended the morning trade down 0.16 point at 143.29.
The Bank of Japan will hold a regular two-day policy meeting this week beginning on Tuesday, but the central bank is expected to hold off on any further easing steps as it monitors the European situation.
Over the weekend, leaders of G8 countries backed keeping Greece in the euro zone and vowed to take all necessary steps to combat financial turmoil and revitalise a global economy increasingly threatened by Europe's debt crisis.
A Greek election earlier this month threw the future of austerity steps into doubt and led to a political stalemate, with another election now set for June 17, a development that had triggered concerns of the country's exit from the euro.
"We have to wait for the next election in Greece, which is nearly a month away," said a fixed-income fund manager at a European asset manager in Tokyo.
In the meantime, he said, the uncertainty could lead to further flattening of the interest-rate curve, and some market participants are betting on this.
"That's what we are doing, currently, taking the 5/10 flatteners or the 10/20 flatteners. That is the only idea that currently we can have, we haven't got anything other than that," he said.
On Monday, though, the yield curve steepened, as longer maturities sold off ahead of a 20-year auction this week.
The 20-year yield gained 3 basis points to 1.610 percent after falling as low as 1.570 percent on Friday, its lowest level since August 2010.
The 30-year bond yield added 3 basis points to 1.765 percent after touching 1.730 percent on Friday, its lowest since September 2010.
The five-year yield added half a basis point to 0.225 percent, moving away from a 1 1/2-year low of 0.215 percent hit on Friday.
Japanese government bond market sentiment deteriorated after benchmark yields fell to a nearly 9-year low last week, but most market participants expect worries about Europe's debt crisis to keep yields from rising, a weekly Thomson Reuters survey showed.
"Unless there is further easing (by the BOJ), the market will likely slip a bit. But as we are unlikely to see a big change toward progress in Greece's situation, any fall will be limited," Satoshi Yamada, chief quantitative analyst at SMBC Nikko Securities, said in a survey response.
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