Japanese government bond futures jumped on Monday, moving away from a seven-year low after Bank of Japan Governor Toshihiko Fukui last week suggested the central bank is in no hurry to raise interest rates.
A rally in US Treasuries on Friday also encouraged market players to cover short positions in JGBs, which had been sold off in the previous four weeks on a spike in global bond yields, as well as on worries of a BoJ rate hike as early as July.
Fukui said the central bank wanted to be more convinced of the sustainability of capital spending and consumption before changing monetary policy, relieving some who had been worried about an interest rate hike next month. He spoke after the BoJ kept interest rates at 0.50 percent on Friday, as widely expected.
Still, a Reuters poll taken after Fukui's comments showed a majority of market players expect the BoJ to lift its overnight interest rates to a 12-year high of 0.75 percent in August. Half forecast a further rate rise in January or February.
Analysts said expectations of a rate rise in the next few months would cap JGB gains as the market calmed from the intense selling seen in the last few weeks, and that longer maturities would stabilise around current yields.
"The sell-off to 1.985 percent in the 10-year yield was overdone, so the market is happy with the yield in the 1.8 percent region for now," said Akihiko Inoue, a market analyst at Mizuho Investors Securities.
The 10-year yield fell 4.5 basis points to 1.890 percent, moving away from an 11-month high of 1.985 percent hit last week. Analysts said they expected the yield to hover around 1.8-1.9 percent ahead of the expected rate rise. September futures ended 0.34 point higher at 131.64, pulling away from a seven-year low of 130.76 hit last week.
The two-year yield slid 2.5 basis points to 1.005 percent after climbing to a decade high of 1.100 percent last week. The five-year yield was down 3 basis points at 1.485 percent, falling away from last week's all-time high of 1.605 percent. The 20-year yield fell 5 basis points to 2.300 percent as investors hunted for bargains after the yield hit an 11-month high of 2.355 percent last week.
JGBs were boosted after US Treasuries rose on Friday, pulling the benchmark 10-year yield further away from a five-year high as benign data on core inflation and weak consumer sentiment reduced prospects that the Federal Reserve would raise rates.
With Fukui's post-policy meeting news conference now out of the way, the market is looking ahead to the BoJ's quarterly tankan business sentiment survey due on July 2 for clues on the timing of the next rise in interest rates.