US retail sales rose 0.8 percent in July, rising for the first time in four months and surpassing a consensus estimate for a 0.3 percent gain. The figures suggested the slowdown in economic growth during the second quarter will prove temporary.
The September 10-year JGB futures contract shed 0.23 point to 143.73 after earlier touching a 6-week low of 143.66, while the December contract fell 0.13 point to 143.59.
Cash bond trading continued to be relatively thin, with many market participants away for Japan's summer "Obon" holidays, but futures volume picked up to 34,204 contracts, up from a one-month low of 12,361 contracts on Monday and above last week's average of 31,510.
"There was some hedging activity in futures today, off the rise in US yields overnight, and this carried over into cash bonds, though supply/demand factors limited movements there," said a fixed income fund manager at an asset management firm in Tokyo.
The 10-year yield added 3 basis points to 0.820 percent, their highest level since July 4 and 10 basis points above their nine-year low of 0.720 percent hit last month.
The superlong sector also weakened, with yields on 20-year JGBs also adding 3 basis points to 1.650 percent, while those on 30-year bonds rose 2.5 basis points to 1.855 percent.
UTILITIES ISSUES GARNER DEMAND
The Bank of Japan's holdings of government bonds exceeded its self-imposed cap when bonds taken up under its asset-buying programme are included, data released by the central bank on Tuesday showed.
The BOJ aims to restrict the balance of its bond holdings to the value of bank notes in circulation -- the so-called banknote rule -- to avoid bankrolling public debt.
Bonds purchased under the bank's asset-buying programme are exempt from the self-imposed rule. The BOJ also buys JGBs under a separate market operation to funnel long-term funds to the economy, dubbed the "rinban" operation.
The balance of the BOJ's government holdings totaled 80.97 trillion yen as of Aug. 10, exceeding the 80.79 trillion yen worth of bank notes in circulation.
"If recent under-subscriptions in the 1- to 3-year sector become chronic, there may eventually be a need for discussion on whether to revise the banknote rule or scale back rinban operations," said Barclays Securities Japan strategist Noriatsu Tanji in a note to clients.
Also on the debt front, three utilities -- Kyushu Electric Power, Tohoku Electric Power and Hokuriku Electric Power -- have priced and issued bonds over the past week.
The issues met strong demand even though primary markets shunned the sector after Japan's March 2011 disaster raised fears about the future of nuclear power, as the risk premium placed on bonds issued by utilities lured yield-hungry investors.