TOKYO: Japanese government bonds gained on Tuesday as renewed worries over the measures adopted by European leaders to fight their debt crisis prompted safe-haven bids from investors.
JGBs were also supported by hopes that Tuesday's 2.5 trillion yen ($32.13 billion) five-year bond auction will be digested smoothly, market players said.
"After something of a rally in risk assets, people have come back to a consensus that the euro zone deal on Friday is not going to become a solution to its fundamental problems," said a trader at a major Japanese bank.
"Because overseas bond markets are up, short- and medium-dated JGBs have also been lifted."
In cash bonds, the benchmark 10-year JGB yield fell 1 basis point to 1.005 percent, marking its lowest in nearly two weeks.
The yield earlier this month hit a four-month high of 1.090 percent when a failed German bond auction sparked fears that investors could start dumping Japanese bonds given Japan's indebtedness, but yields came back down as such worries abated after successful Japanese bond auctions.
The five-year yield declined 1.5 basis points to 0.335 percent ahead of an auction of the maturity on Tuesday. Although the monthly sale amount is increasing by 100 billion yen from this month, many market participants expect new bonds to be underpinned by demand from investors such as Japanese banks, the main players in the maturity.
Japan's government increased its monthly sales of five-year JGBs as it tweaked its debt sales plan after it compiled a budget for rebuilding after a massive earthquake.
The coupon of the new bonds was set at 0.4 percent, up from 0.3 percent at the previous sale in Nov. "New bonds are likely drawing decent demand due to the large amount of bond redemptions this month," said a trader at a US brokerage.
The auction results are set to be released at 12:45 p.m. (0345 GMT)
March 10-year JGB futures rose 0.19 point to 142.16.
US Treasuries rallied on Monday as the optimism on Wall Street that followed last week's EU summit faded.
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