Japanese government bond futures dipped to a 2-1/2-month low on Friday as Tokyo shares tracked Wall Street higher on a softer yen and hopes for the US government's plan to shore up the financial system. But futures trimmed losses on the gloomy outlook for the global economy before the US pay-rolls report for January lands later in the day.
It is expected to show more job losses, keeping the appeal of safe-haven debt intact. Short-term maturities continued to draw support from Thursday's comments by Bank of Japan Policy Board member Atsushi Mizuno, which fuelled market speculation the central bank would increase efforts to help lower term interest rates, traders said.
"The short-term bonds are supported by an apparent improvement in market sentiment after Mizuno's comment," said Toshiaki Terada, a market economist for Totan Research.
Mizuno said on Thursday that the BOJ, which is already guiding overnight interest rates near zero and has been buying corporate debt, should study ways to lower term interest rates, meaning lending beyond overnight funds such as for periods of three months.
Mizuno went so far as to say the central bank should take into account a likely rise in government debt issuance in the near future, which some market players said may mean the BOJ will consider absorbing more debt if conditions are extreme enough to warrant it.
"The yields of shorter maturities look too high, given the dire economic outlook and growing expectations for further steps from the BOJ to shelter the faltering economy," said a senior trader at an European bank.
March futures fell 0.10 percent to 138.35 but trade was choppy. They briefly rose into positive territory after opening at the day's low of 138.26, their lowest since mid-November.
The five-year yield dropped 1.5 basis points to 0.765 percent, off 0.785 percent, a 1-1/2-month high touched the previous day.
The two-year yield slid 1.5 basis point to 0.410 percent, falling from a 1-1/2-month high of 0.440 percent also hit the previous day. Longer maturities under-performed shorter bonds after dealers reduced inventories as the Ministry of Finance offered 150 billion yen ($1.7 billion) in JGBs in an enhanced liquidity auction, as scheduled.
Trade in longer-dated bonds was also limited as many investors sat on the sidelines to see how the US jobs data due 1330 GMT and the developments in Washington over a 900 billion dollar stimulus bill that US President Barack Obama is urging for will impact US Treasury markets and their longer-dated yields trading near two-month highs.
The benchmark 10-year yield rose half a basis point to 1.335 percent, off the day's high of 1.350 percent, which matched a 1-1/2-month peak hit earlier this week. The 30-year yield rose 3.5 basis points to 1.970 percent, the highest since December 19. The 20-year yield rose 2.5 basis point to 1.930 percent after climbing as high as 1.935 percent, a 1-1/2-month high.
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