Japanese government bonds dipped on Monday after a key survey of business sentiment did little to change expectations for an interest rate rise as early as August, and due to selling by dealers ahead of a 10-year bond auction.
JGB futures rose to three-week highs early in the session after the Bank of Japan's June tankan survey generally matched forecasts and after US Treasuries rose late last week.
An initial fall in Tokyo share prices also lent support to JGBs but the gains proved fleeting, as the tankan kept intact market expectations for the BoJ to raise interest rates to 0.75 percent from 0.50 percent, perhaps as early as next month. "It was mixed overall. While it won't justify a rate rise in July, the chances seem higher that there will be a rate rise in August," said Mitsumaru Kumagai, chief JGB strategist for Merrill Lynch.
September 10-year JGB futures fell 0.11 point on the day to 131.90 having erased gains after climbing to a three-week high of 132.23 in morning trade. The benchmark 10-year JGB yield rose 1.5 basis points to 1.885 percent as of 0712 GMT. In the stock market, the Nikkei share average trimmed earlier losses and eked out a gain of 0.04 percent US Treasuries rallied on Friday after a closely watched gauge of US consumer inflation fell in May to its slowest annual pace in three years.
The tankan showed a headline diffusion index for big manufacturers' sentiment of plus 23, matching the market's median forecast and unchanged from the previous survey in March.
"The headline figures are as expected, but there are a few worrying points, such as current as well as future weakness in smaller firms, and a drop in the sentiment index for the raw materials sector," said Mari Iwashita, a fixed-income strategist at Daiwa Securities SMBC. Swap contracts on the overnight call rate indicated that markets see a 77 percent chance of a BoJ rate rise in August and just a 19 percent probability of a rate rise at the BoJ's two-day policy meeting next week. Market players said it was still unclear whether the Finance Ministry would offer 1.9 trillion yen in 10-year JGBs on Tuesday with a coupon of 1.9 percent or 1.8 percent. While current 10-year yields are closer to 1.9 percent, market playerspon on a 10-year offer since last August.