TOKYO, Feb 1 (Reuters) - Japanese government bonds weakened on Monday as investors sold cash bonds to make room in their portfolios before a sale of benchmark 10-year notes the following day.
But futures hovered within reach of a one-month high hit late last week as a fall in Tokyo's Nikkei stock average made traders cautious about selling.
'There are few reasons to sell JGBs other than tomorrow's auction,' said Makoto Yamashita, chief Japan interest rate strategist at Deutsche Securities.
'If the dollar/yen and the Nikkei finish the fiscal year in March around their current levels, then 10-year yields would definitely look attractive.'
March 10-year futures fell 0.11 point at 139.40, having traded in a relatively tight range. The lead futures contract on Friday rose as high as 139.71, its highest since late December.
The benchmark 10-year yield rose 1.5 basis points to 1.330 percent.
The Ministry of Finance will offer 2.2 trillion yen ($24 billion) of 10-year JGBs on Tuesday.
Market players expect the debt sale to go smoothly, especially after data showed last week that the economy is still mired in delation, which could prompt the Bank of Japan to ease monetary policy further.
'Investors may not get too excited to see a 10-year issue reopened for the second time, but secondary market demand for the paper is likely to be steady,' said Takafumi Yamawaki, a senior rates strategist at BNP Paribas Securities.
The coupon on the 10-year paper is expected to be set at 1.3 percent, unchanged from the last two auctions of the maturity. That means the ministry is likely to sell the notes in a second reopening of the current No. 305 issue.
The central bank has been under political pressure recently to do its part to fight deflation and support the economy. The latest call came from Finance Minister Naoto Kan, who said in an interview with the Nikkei daily that the BOJ may need to do more on the monetary policy front to stop deflation.
Analysts say the BOJ may be urged to take further easing steps such as extending the fund-supply operation it introduced in December or increasing its monthly buying of government bonds.
Investors are likely to increase their bond buying if Tuesday's debt sale draws solid demand, analysts said. Some players still need to boost their JGB holdings before the fiscal year ends, and as uncertainty grows over the strength of the Tokyo stock market.
The Nikkei stock average ended little changed on the day, firmly capped as fiscal concerns in Europe prompted investors to avert risks while lifting the yen against the euro.
The 20-year yield was up 0.5 basis point at 2.120 percent.
The five-year yield rose 1 basis point to 0.500 percent .
The five-year/20-year yield spread was little changed on the day at 162 basis points. Over the past month the spread has been confined between 160 and 165 basis points.
(Additional reporting by Shinichi Saoshiro; Editing by Hugh Lawson)
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