TOKYO: Japanese government bond prices edged lower on Monday on hopes that central banks in Europe and the United States may take more action to bolster their economies and as market players braced themselves for a 10-year bond auction the next day.
Traders fear the auction of 2.3 trillion yen ($29.3 billion) 10-year JGBs on Tuesday may not attract strong demand as investors are likely to hold off on buying as they await policy announcements from the U.S Federal Reserve on Wednesday and the European Central Bank on Thursday.
"Market players are unwinding their risk-off trade for now. Although Japan's industrial output is worrying, the market's focus is on global factors," said Naomi Muguruma, senior bond strategist at Mitsubishi UFJ Morgan Stanley Securities.
Japan's industrial output was much weaker than expected, falling for a third straight month in June to the worst level since May last year, when firms were still dealing with the damage from natural and nuclear disasters.
The 10-year JGB yield rose 2.5 basis point to 0.765 percent , pulling further away from a seven-year low of 0.720 percent hit last week.
"After the 10-year yield fell below 0.8 percent, there haven't been serious buying from investors. Investors do need a 0.8 percent coupon on the new offer," said a trader at a European brokerage.
The 10-year JGB futures fell 14 ticks to 144.21, staying above an important technical support at 144.10, where sits the kijun line on the daily Ichimoku chart.
A break of that level could open the way for a test of 143.77, a 23.6 percent retracement of its the futures' rally since mid-March to a nine-year high of 144.64, though the chance of that happening is seen slim for now.
In the near-term, the ECB's policy meeting is seen as holding the key.
If the ECB announces fresh bond buying, that could prompt further unwinding of risk-off trades and weigh on JGBs, said MItsubishi UFJ's Muguruma.
On the other hand, if the ECB cuts rates, that could boost speculation of the BOJ's easing and support JGBs, she added.
Latest Reuters survey showed last week most economists expect the ECB to hold rates in August though many of them expect a cut later this year.
As for the Fed, expectations of another round of quantitative easing are rising, though few see the Fed doing so in August.
With the global economy seen susceptible to Europe's deepening debt crisis, sluggish US growth and slowdown in China, many market players expect JGBs to stay supported.
"The BOJ could also ease its policy in the future. I don't expect a deep fall in JGBs. I think the 10-year yield is likely to peak below 0.8 percent," said the European brokerage dealer.
The 20-year bond yield rose 2.5 basis point to 1.590 percent while the 30-year bond yield also rose as much to 1.795 percent, hitting highest level in more than two weeks.
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