TOKYO—Japanese government bond yields dropped as sliding Asian stock markets sent investors crowding into safe-haven assets.
The benchmark 10-year yield shed 0.04 percentage point to 1.225%. The five-year yield hit a seven-year low of 0.365% before ending at 0.37%. Analysts said yields, which move inversely to prices, could fall further this week amid more global financial-market jitters.
Also pushing investors into bonds was a slide in the euro against the yen to a fresh 8 1/2-year low, which hurts Japanese exporters.
Concerns over contagion from sovereign debt woes in Europe were stoked Friday after a Hungarian official compared the country's problems to those of Greece. Adding to global financial market jitters was a weaker-than-expected employment report that showed the U.S. economy added only 41,000 private-sector jobs in May, far short of expectations for a 188,000 increase.
As European debt worries mount and poor U.S. data add to uncertainties about the global economic recovery, "the 10-year JGB yield (may) turn lower this week for the first time in three weeks," said Jun Ishii, chief fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities. He said it could reach 1.20%.
Another positive factor for the JGB market is speculation that incoming Japanese Prime Minister Naoto Kan will be more effective than his predecessor in reining in the country's massive debt. Both Prime Minister Yukio Hatoyama and Democratic Party of Japan secretary-general Ichiro Ozawa resigned last week.
"The borrow-and-spend approach of the former Hatoyama-Ozawa leadership duo will end and the Kan administration will aim for sounder finances," said Mitsubishi UFJ Morgan Stanley Securities's Ishii. Expectations that Kan will be stricter than his predecessors in limiting JGB issuance may make investors "feel more secure about purchasing long- and superlong-term JGBs," Mr. Ishii said. With yields in the short and medium-end of the curve already very low, that could result in a bull flattening.
But the government's auction of 600 billion yen ($6.54 billion) of 30-year paper Tuesday, although likely to be absorbed smoothly, may not attract strong demand given the bond's unattractively low yield level, some analysts said. That could forestall any further falls in the 30-year yield for now, said RBS Securities Japan in a research note. "We doubt the auction will drive JGB yields down further," RBS said. "Instead, we expect the 30 year to take a break after performing well over the past few weeks."
The 30-year yield fell 0.04 percentage point Monday to 2.045%.
Write to Andrew Monahan at andrew.monahan@dowjones.net
