Japanese government bond futures touched their highest in a month on Friday as data showing the country slipping back into deflation prompted some investors to hunt for bargains. The benchmark 10-year JGB yield fell below 1.4 percent for the first time since early April, with price gains in cash bonds driven by the rally in futures.
Japan edged back into deflation for the first time in more than a year in March, while the unemployment rate hit a four-year high and the availability of jobs slid to its lowest in seven years.
"Japan's data overall today was weaker than expected, prompting investors to buy on dips," said Naomi Hasegawa, senior fixed-income strategist at Mitsubishi UFJ Securities. Lead June 10-year JGB futures closed up 0.48 point at 137.47 after rising to 137.54, their highest since early April.
The benchmark 10-year JGB yield fell 2.5 basis points to 1.395 percent, dipping below 1.4 percent for the first time since early April.
The core consumer price index fell 0.1 percent in March from a year earlier, putting Japan in its second round of deflation in less than two years, and the jobless rate rose to 4.8 percent. "Some of Japan's data such as exports and industrial production may have passed their worst period, but labour market and inflation data may show even worse figures in coming months. So the JGB market showed a solid tone on a tug-of-war of mixed figures," Hasegawa said.
Figures out on Thursday had shown a bigger-than-expected rise in industrial production, signalling Japan's plunge in output and exports may be nearing an end. The 20-year yield slipped 1.5 basis points to 1.995 percent.
The spread between yields on the 20-year and two-year bonds narrowed to 162 basis points after surging to a three-year high of 174 in late April on market nervousness about additional supply stemming from aa government stimulus package "It seemed that those who built short positions while supply worries were the dominant theme continued to cover their positions as the JGB market showed resilience before a long holiday," said a trader at a Japanese securities house, referring to public holidays in Japan from Monday to Wednesday next week.
The five-year yield fell 1.5 basis point to 0.795 percent. While Japanese financial markets are closed for Golden Week, players will be looking watching developments in the US financial system and auto industry, traders said.
US regulators have stress-tested the 19 largest US banks to determine their capital needs should economic conditions deteriorate further. The announcement of the results has been pushed back, possibly to May 6, a source familiar with the matter said on Thursday. A delay in the results disclosure has added uncertainty to the banks' situation, underpinning the JGB market, dealers said.
Investors will also be focusing on the fate of struggling General Motors Corp after Chrysler LLC filed for bankruptcy on Thursday, they said.
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