The benchmark Japanese government bond yield struck a four-month low on Friday as fund manager buying of long-term bonds at the end of the month boosted the broader market. Long-term bonds performed best as institutional investors pick up the issues to match changes in portfolio benchmarks both for the month-end and the looming end of the July-September quarter.
Larger-than-usual extensions in the duration, or average maturity, of the Nomura BPI index mean that pension funds and other investors need longer-dated paper to match those changes, traders said.
"The market was boosted by month-end demand, as well as buying by speculators who bet month-end demand would spark a rally," said Hidenori Suezawa, chief fixed-income strategist at Daiwa Securities SMBC. The benchmark 10-year yield fell 2 basis points to 1.405 percent after hitting a four-month low of 1.400 percent.
Japan unveiled plans on Friday to spend about $16.5 billion extra this year to ease the pain to businesses and consumers from rising oil and food prices.
The market's focus was on whether the government would issue more debt to fund the package, potentially hurting the JGB market. But such jitters were eased after Prime Minister Yasuo Fukuda said on Friday the government did not plan to issue extra government bonds.
MUTED REACTION:
"The planned package will likely have little negative impact on the JGB market as the government said it would not issue debt-covering bonds to finance it," said Naomi Hasegawa, senior fixed-income strategist at Mitsubishi UFJ Securities.
The bond market showed muted reaction to the government's package, with the lead September 10-year futures moving little in after-hour trade. September futures ended the regular session up 0.12 point at 138.37. The lead futures contract hit a four-month peak of 138.80 in Tuesday's evening session.
Market players were keeping an eye on what many analysts and traders have said is crowded trade in JGB futures. Foreign funds, such as trend-following CTA accounts, have piled into futures and pushed their prices up steeply relative to the cash market on expectations the Japanese economy will remain stagnant.
As a result, seven-year yields are on top of the five-year yield now in what is a very unusual move. The five-year yield fell 2 basis points to 0.970 percent. The 20-year yield dropped 4 basis points to 2.080 percent, while the 30-year yield fell 3.5 basis points to 2.285 percent.
JGBs have climbed as the economy has lost steam, but the rise petered out this week as Bank of Japan officials have made clear the next move on policy is likely to be a hike in interest rates, even while sticking to their neutral policy stance. A slew of economic data showed core consumer inflation hitting a decade-high 2.4 percent, industrial output rising more than expected and the jobless rate dipping. Altogether, the data highlighted how the economy is struggling from the surge in energy and other costs.
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