TOKYO: Japanese government bonds tumbled on Thursday after an uninspiring 5-year auction failed to blunt the impact of surging Japanese equities, pushing benchmark yields away from last week's 9-1/2-year low.
JGBs tracked a drop in US Treasuries prices after the US Federal Reserve announced a new bond buying programme in the previous session, while Japan's stock market rally also undermined demand.
The Nikkei gained 1.7 percent to close at an eight-month high, led by a rally in exporters, as the yen dropped to its lowest level since March against the dollar.
Yields on 10-year JGBs added 2.5 basis point to a two-week high of 0.725 percent, moving away from last week's low of 0.685 percent, which was the lowest since June 2003.
Ten-year JGB futures for March ended down 0.30 point at 144.40 point.
"We are very cautious of these levels. It might look like a dip to those investors who are still bullish, but we remain neutral for now, cautious of a bearish bias going forward," said Maki Shimizu, senior strategist at Citigroup Global Markets Japan.
"Below 0.7 percent for 10-year yields cannot be justified, but until last week, the momentum was heading toward even lower levels for yields," she said.
The Fed said it will buy $45 billion in Treasuries each month on top of the $40 billion per month of mortgage-backed bonds it started buying in September.
"The Fed's move adds to pressure already on the BOJ to act next week," said a fixed-income fund manager at a European asset management firm in Tokyo.
The Bank of Japan will meet on Dec. 19-20, and will most likely increase its asset-buying and lending programme, currently at 91 trillion yen ($1.1 trillion), by another 5-10 trillion yen, sources have said.
Japan's general election on Sunday is also likely to result in more pressure on the BOJ to ease further. The opposition Liberal Democratic Party is likely to secure a majority, and its leader, Shinzo Abe, is already pushing the central bank to take aggressive monetary steps. His pronouncements led to the so-called "Abe trade" in recent weeks, characterised mainly by a weaker yen.
"Initially, 'Abe trades' in fixed income seemed to focus more on the negative aspects such as fear of fiscal deterioration and loss of central bank independence, but recently we are starting to see more positioning for economic recovery," said Neale Vincent, strategist at Nomura Securities in Tokyo.
"The curve past 10-years likely can remain steep while 10's are between 0.7 percent and 0.8 percent but flatten outside of that range. When we got below 0.7 percent in 10's recently, investors started to take profits in that sector and shift up the curve," he said.
If the 10-year yields rise above 0.8 percent, the long end should attract strong dip buying from life insurers, he added.
The yield curve steepened on Wednesday as the superlong sector underperformed, with yields on 30-year JGBs adding 4.5 basis points to 1.940 percent, while those on 20-year bonds rose 4 basis points to 1.695 percent, their highest since Nov. 1.
The Ministry of Finance offered 2.5 trillion yen of 5-year notes on Thursday with a coupon of 0.2 percent, matching that of the previous seven sales. The lowest accepted price of 100.17 was in line with market expectations, but the sale's bid-to-cover ratio came in at 3.54, down from 4.96 at last month's sale. The tail between the average and lowest accepted prices widened slightly to 0.01 from zero last month.
The 5-year yield rose half a basis point to 0.165 percent.
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