Japanese government bond (JGB) prices bounced back from early losses on Monday as renewed worries about the health of the nation's banking system sent Tokyo stocks reeling.
Japanese government bonds were also helped in part by the yen's ongoing rise against the dollar, which Japanese officials worry could hurt the nation's export-led economic recovery.
Share prices were hit by rising concerns over the financial system after a local media report that the nation's financial watchdog would investigate a subsidiary of Japan's fourth-biggest banking group.
Business daily Nihon Keizai said on Saturday that the Financial Services Agency would investigate loan records at UFJ Bank, a core unit of UFJ Holdings, after discovering the financial situation of many borrowers might be worse than shown in its official assessments.
UFJ Holdings said on Monday that the report was untrue.
But some analysts said the investigation could also prompt banks to sell Japanese government bonds.
"There seem to be concerns in the market that the report could ignite worries about Japan's financial system again, and many banks may start selling Japanese government bonds before the end of March book-closings," said Koji Shimamoto, chief strategist at BNP Paribas in Tokyo.
The stock market's benchmark Nikkei average ended down 0.87 percent at 10,972.60, its first close below 11,000 since January 16.
Japanese government bonds notes sold off earlier in the day were bought back as stocks headed lower. By 0616 GMT, key 10-year Japanese government bonds futures for March delivery were up 0.30 point to 138.98, recovering from a drop to 138.49 earlier in the day.
The benchmark 256th 10-year Japanese government bonds yield was down two basis points at 1.310 percent.
Traders were also keeping an eye on the yen, which was hovering around 106.15 per dollar on Monday, within about a half yen of its three-year peak of 105.70 yen hit earlier this month, despite concerns about a weaker dollar ahead of the Group of Seven (G7) meeting on February 6 and 7 in Florida.
A higher yen is considered positive for the Japanese government bonds market as it is believed to hurt Japanese exporters and thus share prices.
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