Japanese government bonds were mostly lower on Friday as players continued to shift positions to riskier assets from safe-haven debt on positive US economic data and relief that Greece will avert imminent default. JGB futures and 10-year cash bonds led declines with brokers making room on their books ahead of a 10-year sale next week, though they trimmed losses as cash-rich domestic investor interest in buying at lower prices remained as support.
The benchmark 10-year yield was up a basis point at 1.140 percent, close to the upper-end of a well-worn range between 1.10-1.16 percent, while the 20-year yield was unchanged at 1.885 percent. The yield spread on 10- and 20-year yields narrowed to 74.5 basis points, the tightest since late February.
"The 10-year JGB yield could have risen at least 10 basis points in the past three days given a 30 basis point rise in 10-year Treasury yields, but the climb in JGB yields was subdued, reflecting firm investor demand for JGBs," said Shogo Fujita, chief Japan bond strategist at Bank of America Merrill Lynch.
US Treasuries suffered from investors' waning appetite for safety as Greece approved austerity measures needed to avert a debt default. The benchmark 10-year Treasury note fell 17/32 in price, its yield rising to 3.17 percent from 3.11 percent on Wednesday.
The two-year yield was down a basis point at 0.160 percent, after rising to a two-week high of 1.175 percent the day before, while the yield on five-year bonds dipped 0.5 basis point to 0.420 percent. An outright JGB purchase by the Bank of Japan and weak Chinese data released on Friday morning triggered more buying in short-term maturities later in the session from investors such as Japanese banks, and contributed to the overall improvement in debt market sentiment.
But as JGB futures and yields are reaching key technical points that may trigger further corrections, market participants are focusing on the release of monthly US factory activity indexes from the Institute for Supply Management. "A stronger than expected Chicago PMI pushed down yields quite a lot yesterday and the market is factoring in strong data, though the ISM numbers should still be watched," a trader said.
Some players expect the 10-year JGB yield to break out of its range as the resumption of JGB auctions next week could weigh on broker positioning, paving the way to a three-month high of 1.3 percent. A 2.2 trillion yen ($27.3 billion) 10-year auction is scheduled for Tuesday and a 700 billion yen 30-year offering will take place on Thursday.
But many still believe a significant rise in JGB yields is unlikely as fundamental problems in the US economy and euro zone are still not fully fixed, and that any improvement in economic data will be short-lived. JGBs had a limited reaction to the Bank of Japan's tankan sentiment indexes on Friday as it indicated a V-shaped recovery which the market had expected.
The survey showed big Japanese manufacturers turned pessimistic about business conditions for the first time since the Lehman crisis in the second quarter but expect conditions to recover in coming months, as the economy gradually emerges from the devastation of the March earthquake and tsunami. September 10-year JGB futures dipped 0.09 point to 140.95, having marked a two-week low at 140.82 and approaching their 200-day moving average hovering around 140.74, seen as key support.
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