Japanese government bond (JGB) prices tumbled on Monday, pushing up yields to multi-year highs on speculation that the Bank of Japan is considering how to exit its super-loose policy in light of growing evidence of Japan's economic recovery.
Such nervousness dominated trade as the central bank began a two-day Policy Board meeting on Monday, with dealers keen to see what BOJ Governor Toshihiko Fukui will say after the meeting.
"The economy seems to be expanding faster than the BOJ had imagined and (consumer) prices have come under more (rising) pressure than expected due to surging oil prices," said Susumu Kato, chief fixed income strategist at Lehman Brothers Japan.
"Yields are rising very rapidly, and the focus now is on how the BOJ sees the situation and whether this will affect its monetary policy," he said. The yield on the benchmark 10-year JGB shot up by seven basis points from Friday to 1.855 percent, a level not seen since late October 2000. The yield has risen by over 41.5 basis points since May 27.
The longer end of the yield curve was hit harder, with the yield on the 30-year JGB rising 12.5 basis points to 2.765 percent.
Concerns about demand in the long- and super-long sectors have been growing as banks hedge against the possibility of higher interest rates by shortening the maturities of their JGB holdings.
Bond yields also have been taking a beating on signs that Japan is well on its way to economic recovery. Last week, economic growth for the first quarter was revised upward to a real 1.5 percent from a preliminary reading of a 1.4 percent expansion, and machinery orders for April rose 11.8 percent from the previous month, far exceeding expectations.
In the futures market, the price of key 10-year JGB futures ended the day session down 0.68 point at 133.95. Some market players are already questioning whether there will be sufficient demand for a 600 billion yen ($5.44 billion) issuance of 20-year JGBs on Thursday, in light of shrinking participation by Japanese banks.
While last week's auction of five-year paper produced a comparatively attractive coupon of 0.6 percent, the noticeable absence of banks resulted in limited buying in the secondary market, which sent yields soaring to seven-month highs.