Japanese government bond futures ended slightly lower on Friday after retreating from a six-month high as investors locked in profits following a fierce rally over the past week.
JGBs have drawn strength from last week's soft consumer price data and weak industrial output data this week that prompted traders to question whether the Bank of Japan will raise rates again this year, or even by the end of next March.
The buying spree pushed the benchmark 10-year yield to a six-month low earlier this session, but gains were later tempered by profit-taking and caution ahead of a 10-year bond auction next Tuesday.
"If the market were to keep its momentum going and the coupon (for the new 10-year issue) becomes 1.6 percent, you have to wonder who would buy," said Tatsuo Ichikawa, chief JGB strategist at ABN Amro Securities. "I think even 1.7 percent would be a risky situation. That's why bonds are becoming heavy," he said.
September 10-year JGB futures ended the day session down 0.09 point at 134.89 after rising as high as 135.20 early in the session, the highest level for a benchmark futures contract since early March. Turnover was a robust 57,066 lots.
The yield on the benchmark 10-year JGB was up 2.0 basis points on the day at 1.640 percent in late trade, pulling back after sinking to a six-month low of 1.600 percent in early trade.
In addition to the 10-year sector, five-year bonds - the sector that gained the most after the so-called "CPI shock" on August 25 - took the brunt of the selling.
"Profit taking is inevitable, because the market has risen too fast," said Kenro Kawano, a JGB strategist at Credit Suisse.
Yields on longer-dated bonds did not rise quite as much.
The 20-year yield rose 1.5 basis point to 2.130 percent while the 30-year yield rose 1.0 basis point to 2.395 percent.
The five-year yield rose 3.0 basis points to 1.105 percent after plunging more than 30 basis points in August, the biggest monthly drop in the maturity since its launch in 2000.
The current level of bond yields suggests that traders have doubts about whether the BOJ will raise interest rates by the end of next March, said ABN Amro's Ichikawa, who added that the fall in yields may have gone too far. "The level of yields and the shape of various curves have returned to about what we saw around when quantitative easing was scrapped (in March)," Ichikawa said.
The big difference compared to then, however, is that the BOJ has since raised the key overnight call rate to 0.25 percent from zero.
"This means that ... unless we see a (market) consensus that the next move may be a rate cut, the current levels cannot be justified," Ichikawa said.
Besides the 10-year auction, a focus next week will be a news conference by BOJ Governor Toshihiko Fukui next Friday, after the central bank's two-day policy board meeting.
While the BOJ is widely expected to keep the key overnight call rate unchanged at 0.25 percent next week, traders are eager to get the BOJ's take on the softer-than-expected July consumer price index (CPI) released last week.
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