TOKYO Jan 8 Yields on benchmark 10-year Japanese government bonds eased on Tuesday as an auction of 2.3 trillion yen ($26 billion) worth of similar maturities went well, although the tone in the market remained weak.
"The 10-year auction was fairly good in terms of bid-to-cover ratio, although it was lower than the previous auction. We saw real demand from regional banks," said Tadashi Matsukawa, head of Japan fixed income at PineBridge Investments.
"But the basic thing is that we still have to absorb an additional amount from next month. The 10-year JGB will have an additional issuance amount of at least 100 billion yen per month. There is still a bit cautious tone present despite a sell-off in equities."
Kyodo news agency reported late on Monday that the Japanese government is likely to sell more than 5 trillion yen in new bonds to fund an economic stimulus package that could be agreed as early as this week.
The 10-year yield slipped 1 basis point to 0.825 percent after touching a 4-1/2-month high of 0.840 percent on Monday, while the Nikkei share average ended down 0.9 percent.
Ten-year JGB futures dipped 1 tick to 143.43.
The Ministry of Finance sold the 10-year debt with a bid-to-cover ratio of 3.52, down from 3.85 in the December auction, but much higher than those achieved in monthly auctions between June and October.
Yuya Yamashita, rates strategist at J.P. Morgan in Tokyo, said concerns over the U.S. fiscal situation would be supportive for JGBs, while expectations that the Bank of Japan would conduct further monetary easing steps under the new government led by Prime Minister Shinzo Abe would help maintain interest in the below 10-year sectors.
"The U.S. fiscal cliff issue has been avoided but it has not been resolved yet because some of the automatic spending cut measures have been deferred," he said, noting that Congress still needed to raise its $6.4 trillion debt ceiling by early March to avoid a first-ever default, which many said would upend global financial markets.
Yields on longer-dated 30-year debt were unchanged at 2.005 percent after touching 2.010 percent, their highest level since early September, 2011, while those on the 20-year bonds were also unchanged, at 1.795 percent.
J.P. Morgan's Yamashita said short to medium-dated bonds would suffer less of an impact from any increase in issuance size as the BOJ was expected to step up its asset purchase programme under the Abe administration, but longer-date debt would come under pressure.
Longer maturities have been coming under pressure for several weeks due to worries about the aggressively reflationary policies of the new government.