Japanese government bond prices edged up on Tuesday, with the five- and 10-year yields hitting one-month lows, as Tokyo shares slumped on concerns about Europe and an accounting scandal at camera maker Olympus .
But 30- and 40-year maturities bucked the trend on selling ahead of a 40-year JGB auction on Thursday and worries about future issuance increases, steepening the yield curve to a level not seen in the last two months.
Lead 10-year JGB futures rose 0.10 point to 142.81 <2JGBv1> while the yield on the cash 10-year JGBs slipped 1.0 basis point to 0.975 percent , its lowest since Oct. 6.
Tokyo stocks were hurt by Olympus' admission that the company covered up losses on securities investments dating back to the 1980s.
"Today, Tokyo share prices fell much more than people had expected because of Olympus. That drove JGBs higher," said Keiko Onogi, senior JGB strategist at Daiwa Securities.
But Onogi also said that the 10-year yield is unlikely to fall below its recent bottom of 0.965 percent, hit twice in recent months, as many investors tend to take profits at those levels.
The five-year yield briefly dropped 0.5 basis point to a one-month low of 0.335 percent .
Strong buying in the Finance Ministry's re-offering on Tuesday of bonds that are in circulation -- called a liquidity enhancing auction -- also helped the market, particularly in the 20-year sector.
Still, the looming auction of 400 billion yen in 40-year JGBs on Thursday undermined the longest end of the curve. Market players are nervous as the previous 40-year sale in August drew weak demand.
"The curve is steepening ahead of the auction. But there's also expectation that the trend will change after the auction," said Katsutoshi Inadome, strategist at Mitsubishi UFJ Morgan Stanley Securities.
The 30-year bond yield rose 1.0 basis point to 1.955 percent while the 40-year bond yield <0#JPTSY4=BBRQ> rose 2.5 basis points to 2.205 percent.
The spread between the 10- and 30-year yields rose to 98 basis points, matching a peak hit three times between August and September, and edging closer to high of 101.5 basis points hit in the days after the earthquake in March.
While some market players expect superlong bonds to rebound after the auction, market players also said expectations that the government could increase sales of 30-year bonds in the new fiscal year from April also undermined the sector.
The government is expected to announce the JGB sales plan for the next fiscal year in late December when it compiles the new year's budget.
The market showed no reaction to the news that the government struck a deal with the opposition to redeem bonds to finance reconstruction after the quake in 25 years, rather than 10 years. (Reporting by Hideyuki Sano; Editing by Chris Gallagher)