Japanese government bonds were steady on Friday, supported by fears about slowing global growth and underpinned by the easy monetary policy of major central banks. The yield curve, however, flattened slightly, later in the afternoon, as some investors took advantage of recent cheapness in the superlong sector. Data on Thursday showed US manufacturing suffered its weakest quarter in three years and European business conditions deteriorated, while Chinese manufacturing was also limp.
The US Federal Reserve and the Bank of Japan both decided this month to expand their quantitative easing (QE) stimulus programmes. The European Central Bank unveiled its plan to lower borrowing rates of debt-burdened euro zone countries. "QE is a vol killer. Every time you get QE, overall volatility in all asset classes declines, especially rates, so that's why we probably need to wait for other catalysts," said Le Ngoc Nhan, a strategist at Morgan Stanley MUFG
On the supply side, next week marks the end of the July-September quarter, and funds could make more purchases to extend the duration of their portfolios. "Some investors likely already bought superlongs on recent dips, but we might see some more buying next week," said a fixed-income fund manager at a European asset management firm in Tokyo. The 10-year JGB futures contract for December ended flat at 143.80.
The yield on the benchmark 10-year cash bond was also flat at 0.800 percent, mired in the middle of this month's range between 0.775 percent and 0.835 percent. The 20-year bond yield slipped half a basis point to 1.670 percent, and the 30-year yield fell 1 basis point to 1.925 percent it rose to a more than five-month high of 1.950 percent in the previous session.
With cash bond trade mostly subdued as investors assess the supply and demand situation, market participants considered other trading ideas. Both swap rates and swap spreads in the super-long sectors correlate highly with the euro/yen exchange rate, said strategists at Credit Suisse in a note to clients.
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