Japan's 10-year yield tracks US Treasury peers' drop

Japan's 10-year government bond yield fell sharply on Monday, tracking US Treasury yields, before erasing some declines as the Bank of Japan (BOJ) cut its offer for its regular bond buying.

The 10-year government bond yield dropped 4.5 basis points (bps) to 0.655 per cent earlier in the session, but trading last at 0.685 per cent, down 1.5 bps from the previous session.

"The yield dropped sharply in line with the declines on US Treasury yields but investors were cautions about the falling yields because the BOJ may end its negative rate policy sometime, which could lift yields up," said Hideki Shibata, senior strategist at Tokai Tokyo Research Institute.

US Treasury yields dropped on Friday after comments from Federal Reserve Chair Jerome Powell fanned cautious optimism that the central bank was done hiking rates, while more weak data on the manufacturing sector underscored that the surprisingly robust economy remains fragile.

The BOJ on Monday reduced its offer for the bonds with maturities between 10 years and 25 years at its regular bond buying operation, pushing up the 10-year JGB yield from the session low.

"Basically the BOJ is on its way for normalizing the policy, which discourages investors to buy JGBs," said Shibata.

The 20-year JGB yield was flat at 1.435 per cent and The 30-year JGB yield rose 0.5 bp to 1.665 per cent.

The 40-year JGB yield rose 1 bp to 1.930 per cent.

Yields on shorter-maturities fell, with the two-year JGB yield dropping 1 bp to 0.030 per cent and the five-year yield falling 1.5 bps to 0.250 per cent.