TOKYO: government bond inched lower on Monday, extending the previous session's sell-off, with the 10-year yield hitting a 4-1/2-month high ahead of Tuesday's auction of the similar maturity.
The 10-year yield added 0.5 basis point to 0.840 percent, its highest level since Aug. 21, after rising 4 basis points on Friday to log its biggest one-day rise in five months as Japanese equities rallied, buoyed by a weaker yen and a deal in Washington to avert the "fiscal cliff".
Ten-year JGB futures rose 7 ticks to 143.39 after shedding 33 ticks on Friday, their biggest one-day drop in a month.
"Equities are the winners for now among different products. The equity rally will likely continue as long as the policy expectations continue for the Abe administration," said Maki Shimizu, senior strategist at Citigroup Global Markets Japan.
Prime Minister Shinzo Abe has called on the Bank of Japan to set a 2 percent inflation target, and has also vowed to select someone who shares his views on aggressive stimulus to succeed BOJ Governor Masaaki Shirakawa when his term expires in April.
Yields on 30-year debt edged up 0.5 basis point to 2.00 percent, touching a 13-month high, while those on 20-year bonds added 0.5 basis point to 1.790 percent.
Shimizu said the auction of 2.3 trillion yen ($26.12 billion) of 10-year bonds was likely to meet cautious demand, although the latest issue could carry a coupon of 0.8 percent, 10 basis points higher than that on the previous sale.
She said she expected the benchmark 10-year bonds would trade at an average yield of 0.850 percent for this quarter and could be close to 0.90 percent at the end of March.
A weekly gauge of sentiment in the JGB market skidded to its lowest level since July, the latest Reuters poll showed. The median forecast for the 10-year yield at the end of this week is 0.850 percent.
Benchmark JGBs lost 9.8 percent in 2012 in dollar-based terms, according to Reuters data, due to a 12.8 percent drop in the yen against the dollar.
Center>Copyright Reuters, 2013