Japanese government bonds gained on Friday as surging bond yields in eurozone nations fuelled fears the debt crisis there could spiral out of control, with the yield curve bull-flattening as super-longs were picked up on dips. In a sign that global funding strains may spread to Asia, three-month euroyen interest rates futures fell to an eight-month low of 99.640, and the spread between the two-year swap rate and the two-year JGB yield expanded to 25.4 basis points, its widest level in a year.
"Funding strains in the global cash market are prompting selling of euroyen rate futures and pressuring short-term yen swap rates," said a trader at a Japanese bank. "JGBs and US Treasuries will likely draw flight-to-quality demand for now," he said. A fall in eurodollar rate futures sparked speculation that banks may rely more on yen funding as the dollar money market seizes up, although yen money market rates including the Tokyo interbank offered rate have been mostly stable thanks to massive fund injections by the Bank of Japan. Katsutoshi Inadome, fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities, said rates at the short-end of the yield curve could climb because London interbank offered rates (LIBOR) are facing upward pressure on eurozone woes.
Lead 10-year JGB futures rose 0.12 point to 143.09 on Friday, not far from a one-year high of 143.14 hit on Thursday. The benchmark 10-year yield was down 1 basis point at 0.940 percent, near a one-year low. Declines in yields of superlong bonds such as the 20- and 30-year bonds outpaced other maturities, reversing recent climbs in the yields ahead of Tuesday's 1.1 trillion yen ($14 billion) 20-year JGB auction. The 20-year yield declined 1.5 basis points to 1.700 percent and the 30-year yield fell 1.5 basis points to 1.925 percent. The two-year yield was down 0.5 basis point at 0.115 percent, its lowest level since October 2010, and the five-year yield declined 1 basis point to 0.115 percent.
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