Japanese government bonds weakened as higher oil prices and fiscal worries pushed the 10-year yield to its highest since 1996, while investors also watched a roughly 2.5 trillion yen sale of 5-year notes.
Japanese government bonds remained under pressure as higher oil prices and concern over Japan's fiscal trajectory lifted yields, with the benchmark 10-year JGB rising 1.5 basis points to 2.880%, its highest since September 1996. The two-year yield rose 1 basis point to 1.44% and the five-year yield gained 1 basis point to 1.995% ahead of a Finance Ministry auction of about 2.5 trillion yen ($15.38 billion) in 5-year notes. SMBC Nikko Securities' Lisa Mochizuki said higher yields and a sharp narrowing in the negative 5-year swap spread since late last month should support the sale. Yields have climbed since the government outlined large spending plans in an economic blueprint last month and called on the Bank of Japan to align monetary policy with growth efforts, stirring concern that pressure on the BOJ to keep rates low could leave it behind the curve as inflation risks build. A draft obtained by Reuters showed the government is considering revising language on monetary policy in the blueprint. Ataru Okumura of SMBC Nikko Securities said rising yields have reflected fiscal factors and warned that fiscal expansion increases inflation risks.