Japan's five-year notes rose for a second day on speculation the central bank will announce additional stimulus measures at the end of a two-day policy meeting that started yesterday.
Five-year yields fell from near the highest level in three weeks after the government said the economy remains in a "mild deflationary phase" and politicians stepped up calls on the central bank to take more steps to tackle deflation.
The Bank of Japan should work with the government to reverse declines in prices that threaten the recovery, said Finance Minister Naoto Kan. Japan sold ¥1.1 trillion (Dh44.81 billion) of 20-year bonds yesterday.
The yield on the five-year note fell 1.5 basis points to 0.495 per cent in Tokyo at Japan Bond Trading, the nation's largest interdealer debt broker. The 0.5 per cent security due March 2015 rose 0.073 yen to 100.024 yen. The yield climbed to 0.52 per cent on March 12, the highest since Febraury 23.
Ten-year futures for June delivery advanced 0.04 to 138.96 on the Tokyo Stock Exchange. The yield of the 10-year bond was unchanged at 1.34 per cent.
"Any additional BOJ measures will help shore up short-and mid-term notes," said Ryutaro Matsuyama, a Tokyo-based strategist at Mizuho Investors Securities, a unit of Japan's second-largest banking group.
The five-year/20-year yield spread widened by 2.5 basis points to 165.5 basis points, edging closer to a decade-high above 167 basis points struck last week.
The Ministry of Finance's ¥1.1trn sale of 20-year notes attracted bids 3.49 times the offer, its highest since an auction of the same maturity in June, as dealers expected investors to go last-minute shopping for JGBs before the fiscal year ends on March 31.
The strong auction prompted traders to buy back bond futures.
BoJ watchers say some of the easing steps the central bank may consider include increasing the amount of funds it offers through a three-month funding operation introduced in December, extending the duration of this operation or both.