Japanese government bonds slumped on Friday on lingering concerns about a Bank of Japan rate increase as early as in August, with sentiment also hurt by sliding US Treasuries and rising Tokyo shares.
The benchmark 10-year yield hit a seven-month high while futures prices fell to a fresh nine months low as the market's sell-off extended on the rise in the Nikkei share average to a three-month peak.
The two-year yield hit a decade high of 0.995 percent and jumped 7 basis points on the week - the biggest one-week increase since May last year when market players were anticipating the end of zero interest rates.
Expectations for a BOJ rate increase in the coming months have mounted this week after upbeat data on jobs and household spending, as well as remarks by BOJ board member Kiyohiko Nishimura that consumer prices would rise clearly from the latter half of this fiscal year.
"Nishimura spoke without committing himself, but market players took it that the BOJ is moving steadily towards a credit tightening," said Kenro Kawano, a fixed-income strategist at Credit Suisse.
June 10-year futures dropped 0.31 point at 132.86, after falling as low as 132.82 in the morning session.
Market players are now focusing on US jobs data and the Institute for Supply Management manufacturing index due later on Friday to gauge the strength of the US economy and outlook for Federal Reserve policy. The 10-year US Treasury yield hit a nine-month high on Thursday as a strong Midwest business activity report reduced expectations for a Fed rate cut by the year-end.
"Any strong reading for the coming data will push back expectations for a Fed rate cut, and that could encourage views that the Bank of Japan will steadily raise rates in an effort to normalise its monetary policy," Kawano said.
The benchmark 10-year yield rose 2.5 basis points to 1.770 percent after hitting a seven-month high of 1.775 percent early in the session. Over the past week, the 10-year yield was up 5.0 basis points.
The two-year JGB yield rose 1.0 basis point to 0.985 percent after hitting a fresh decade-high of 0.995 percent earlier, with traders eyeing a rise above 1.0 percent for the first time in 10 years.
The five-year yield was up 3 basis points at 1.370 percent after rising as high as 1.375 percent earlier, its highest level since August.
The Bank of Japan has raised rates twice since July last year to a decade-high 0.50 percent, after abandoning an extraordinary super-loose monetary policy in March last year in which it kept the key overnight call rate target at zero.
SOLID FUNDAMENTALS:
The Nikkei share average rose 0.47 percent to close at its highest in three months and briefly topped the psychologically key 18,000 level.
"The rise in 10-year Treasury yields above 4.91 percent and the Nikkei closing in on the 18,000 level are enough to remind JGB investors of solid economic fundamentals within and outside Japan," said Akihiko Yokoyama, chief JGB strategist at J. P Morgan Securities.
"The market, which had not been factoring in good economic conditions, is continuing to make adjustments while eyeing the prospect of a BOJ rate hike in the coming months," he said.
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