TOKYO, Dec 12 (Reuters) - Long-dated Japanese government bond prices tumbled on Monday, driving the benchmark 10-year yield to its highest in 10 months, on the back of continuing gains in U.S. bond yields and Japanese shares.
The longest end of the yield curve came under strongest pressure on growing perception that the Bank of Japan is more tolerant of rises in yields on those maturities than it is on shorter yields.
The 30-year yield rose 8.5 basis points from its previous close to 0.785 percent, now more than 25 basis points above its levels in September when the central bank said it would guide the yield curve where it was then.
"The market is broken. The brokerages who bought a large amount in the previous 30-year bond auction last week are selling them at a discount to investors," said a trader at a Japanese brokerage.
The 40-year JGB yield rose 6.0 basis points to 0.885 percent , now about 30 basis points above its levels just before the BOJ introduced the new policy framework.
While the BOJ's official policy is dubbed as the "yield curve control", the central bank's inaction to the rises in maturities over 10 years in the recent sessions is fanning the view that the BOJ's pain thresholds may be much higher.
Lack of action from the BOJ contrasted with the steps it took in mid-November, when it offered to buy an unlimited amount of short-term bonds, including five-year JGBs at a yield of minus 0.04 percent and two-year JGBs at minus 0.09 percent, to stop rises in those yields.
Since then, shorter yields have stabilised, with the five-year yield standing flat on Monday at minus 0.090 percent, below its 9-1/2-month high of minus 0.040 percent touched last month.
Investors were also cautious in selling 10-year bonds, which they believe the BOJ will have a tighter grip on. It is the only maturity in which the central bank has an explicit policy target, of around zero percent.
Yet, the impact of big rises in 20- to 40-year yields filtered through to the 10-year debt. The benchmark 10-year JGB yield rose 1.5 basis points to 0.065 percent, at one point, climbing to 0.070 percent, its highest since mid-February.
"The market is nervous because the BOJ could come in to stem rises in the yields. So they are testing the water, little by little," said Hideaki Chida, chief fixed income strategist at NLI Research Institute. (Editing by Jacqueline Wong)