But gains were limited ahead of a 2.4 trillion yen ($26 billion) five-year auction on Tuesday and a 1.1 trillion yen 20-year sale on Thursday. The auctions were awaited with cautious optimism following last week's well-received 40-year JGB tender. "The five-year sale is expected to proceed smoothly. The maturity appears more affordable after the recent correction," said Katsutoshi Inadome, a fixed-income strategist at Mitsubishi UFJ Securities.
"Demand from banks is also expected as their lending activity has yet to pick up." The five-year yield dipped 0.5 basis point to 0.510 percent. The yield has pulled back from a four-year low of 0.425 percent struck last month. The benchmark 10-year yield fell 0.5 basis point to 1.315 percent, while the 20-year yield edged up 0.5 basis point to 2.125 percent.
March 10-year JGB futures gained 0.18 point to 139.28 after hitting 139.40, their highest since January 5. The bond market was also keeping an eye on what impact Japan's political situation might have on recently bullish Tokyo equities. Politics grabbed further attention after the No 2 executive in Japan's ruling party vowed on Saturday to stay in his post despite a funding scandal that could scupper the party's chances of winning a midyear election and raise the risk of policy deadlock.
"Japanese stocks appear to be reacting negatively to the latest political developments, in addition to the stronger yen, and this is helping JGBs," said Noriyuki Fukuda, a fixed-income strategist at Morgan Stanley. The Nikkei stock average dropped 1.2 percent after rallying last week to a 15-month high, hurt by concerns over the political scandal and dragged lower by bank shares after J.P. Morgan Chase & Co reported deep fourth-quarter losses.
"The direction of the yen in the wake of worries over Greece is another focal point, as global fund flows could be diverted towards the yen and cause it to appreciate," Fukuda said. The yen bounced back broadly against its peers late last week as investors cut back on risky trades in the wake of fiscal problems buffeting debt-laden Greece, which has faced ratings downgrades and speculation the euro zone might have to bail it out.
A stronger yen can support JGBs by reducing the cost of imported goods which in turn can stoke deflation. It can also weigh on stocks - and thus lift JGBs - by eating into exporters' overseas profits. The dollar was at 90.85 yen, hovering not too far from a four-week low hit against the Japanese currency late last week.
Traders said Japan's five-year credit default swap spread changed hands at 81 basis points on Monday, edging towards an eight-month peak of around 82 basis points hit late in November. This is part of a global widening trend in sovereign CDS spreads as investors turn cautious on the recent fiscal concerns about places such as Greece and Jamaica, traders said.