TOKYO: Japanese government bond prices rose on Tuesday, catching a wave of safe haven demand as confidence faded that the weekend's Spanish bank bailout would be a panacea for euro zone debt woes.
The gains were expected to support demand at the Ministry of Finance's 5-year JGB auction, despite the low coupon set at 0.2 percent.
That matched last month's coupon, which was in line with a record low seen on only two other issues in 2003.
European financial leaders agreed over the weekend to lend Spain up to 100 billion euros ($125 billion) for its bank rescue fund.
But Spanish yields rose on Monday and the cost of buying debt protection on Spain in the credit default swap market reached near-record highs at around 595 basis points, according to Markit. Italy's debt yields and CDS costs also rose ahead of that country's debt sale on Thursday.
"The weekend news of the Spain bank bailout led to a correction yesterday, but it faded because investors wonder, who's next? Italy?" said a fixed-income fund manager at a European asset management firm in Tokyo.
"We need to remember the euro zone's problems are regional, and not solvable just on a country-by-country basis," he said.
The 10-year JGB yield skidded 2.5 basis points to 0.845 percent, moving back toward a nine-year low of 0.790 percent hit on June 4.
The 10-year JGB futures contract for September, which became the front-month contract after the June contract expired on Monday, ended morning trade up 0.21 point at 143.59.
Superlongs lagged the benchmark note ahead of a 20-year sale on Thursday, with the 20-year yield losing 1 basis point to 1.660 percent, while the 30-year yield was flat at 1.840 percent.
The Bank of Japan will hold its regular monthly meeting on Thursday and Friday this week, and is widely expected to stand pat on monetary policy.
Short- and medium term maturities have benefited from the BOJ's policy of buying bonds with up to three years left to maturity, which it decided to extend from two years at its April meeting.
As the central bank is buying up much of the supply at the shorter end of the curve, many market participants expect the BOJ to eventually extend the duration of its purchases to the 5-year sector, which has pushed 5-year yields to low levels and kept them anchored there.
"We think the possibility of a sharp rise by the 5-year yield is very small because additional easing risk linked to rapid yen appreciation exceeds risk of a tightening switch for near-term monetary policy direction," strategists at RBS Securities said in a note to clients.
The five-year yield fell 1 basis point to 0.200 percent, not far from its nine-year low of 0.195 percent touched several times this month.
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