Japanese government bonds under pressure as pre-auction sell-off spreads ahead of Ueda's speech

(1) Japanese government bonds weakened on Monday as the market focused on Tuesday's 10-year bond auction and Bank of Japan Governor Kazuo Ueda's speech the following day. The selling pressure was most pronounced in the 5- to 15-year maturities; despite US Treasuries rising on Friday, Japanese government bonds still opened lower. (2) The 10-year benchmark yield rose 2 basis points to 2.675% in early trading. The yield on the 5-year bond climbed faster than the 10-year at one point; by 10:45 a.m., both yields were up 3.5 basis points from Friday, at 1.92% and 2.69% respectively, while futures touched a daily low of 128.60. (3) According to some traders, the weakness in the 5- to 15-year maturities was mainly due to dealers trying to lighten positions ahead of the 10-year auction. Some market participants believe that the 10-year yield needs to reach 2.7% for the auction to proceed smoothly; however, if that level is touched, new bonds will be issued rather than an additional offering. (4) The market is watching for Governor Ueda's speech to possibly hint at a rate hike at the June 15-16 policy meeting, and investors remain cautious about buying Japanese government bonds at this time. The 30-year maturity performed robustly throughout the day.