JGB prices fall as focus shifts to Japan's extra budget, BOJ decision

By Junko Fujita

TOKYO, May 19 (Reuters) - Japanese government bond (JGB) prices slipped on Tuesday, erasing early gains, as investors awaited details of the government's planned extra budget and the Bank of Japan's upcoming policy decision.

The benchmark 10-year JGB price weakened, sending its yield up 4.5 basis points (bps) to 2.785% from an intraday low of 2.710%. The five-year note also reversed course, with its yield rising 2.5 bps to 2.010%, after dipping to 1.985% earlier in the session.

Yields move inversely to bond prices.

"The firm outcome of the five-year bond auction in the previous session helped investors to buy back bonds, so the yield trimmed rises on Monday and that trend continued till this morning," said Masahito Sugawara, senior strategist at Daiwa Securities.

"The declines in yields were short-lived because investors bought bonds only to cover short positions," he added.

JGBs have remained under pressure as higher oil prices fuelled inflation concerns and reinforced expectations that the central bank will raise interest rates faster than previously anticipated.

Most maturities came under renewed selling pressure for a seventh consecutive session as investors awaited details of the government's extra budget plans.

Japan's government is likely to issue fresh debt as part of funding for a planned extra budget to cushion the economic blow from the Middle East war, a government source with direct knowledge of the deliberations told Reuters on Monday.

Market sentiment was also weighed down by an upcoming auction of 20-year bonds, strategists said.

Investors are also cautious ahead of the BOJ's policy meeting in June, where the central bank is expected to release its economic outlook and update plans for bond purchases.

The BOJ, which has been reducing monthly amounts of bond purchases since 2024, is set to update the pace of the reduction beyond March 2027.

Elsewhere, the 20-year JGB yield inched up 0.5 bps to 3.720%, while the 30-year yield rose 3 bps to 4.130%. The 40-year JGB yield rose 1 bp to 4.355%.

(Reporting by Junko Fujita; Editing by Sherry Jacob-Phillips)