Japanese government bonds were little changed on Friday as stronger-than-expected machinery orders supported the view the economy may not deteriorate much further, while wholesale price data reinforced expectations the Bank of Japan will keep interest rates very low for some time.
JGB futures and longer-dated cash bonds slipped in early trade after government data showed Japan's core private-sector machinery orders fell 1.3 percent in March from the previous month, less than a market forecast of a 4.5 percent decline.
Manufacturers surveyed by the government expect core orders to fall 5.0 percent in the second quarter, after dropping 9.9 percent in January-March. The Bank of Japan is considering slightly upgrading its assessment of the economy this month to reflect a slowing pace of economic deterioration, the Nikkei business daily reported on Friday.
But the bond market recovered most of its losses as separate data enhanced expectations that Japan is slipping back to deflation and that it will be a long time before the central bank raises interest rates from 0.1 percent. BOJ data showed wholesale prices fell 3.8 percent in April from a year earlier, the fastest drop in 22 years.
"Today's data showed the economy is bottoming out, while price growth is turning negative and may stay that way for a while," said Makoto Yamashita, chief Japan interest rate strategist at Deutsche Securities. Longer-dated bonds were vulnerable as hopes for an economic recovery remain, but the wholesale price data would support shorter-dated notes, Yamashita said.
June 10-year JGB futures edged up 0.10 point to 137.04, having risen from a 6-1/2-month trough of 136.30 hit on Wednesday. The lead contract rose to positive territory in afternoon trade, with speculators buying back short positions as they realised JGB prices had limited scope to fall.
The benchmark 10-year JGB yield was unchanged on the day at 1.425 percent, after rising as high as 1.440 percent. The 10-year yield has traded in a 1.395-1.490 percent range for over a month. The Nikkei share average ended up 1.9 percent as machinery stocks rallied after Friday's data.
Activity was subdued with investors cautious due to lingering speculation that a scheduled boost in JGB issuance in the coming months could eventually lift JGB yields.
"We don't know how the increase in bond issuance will impact bond yields until the government actually starts selling more JGBs," said Yuuki Sakurai, general manager of financial and investment planning at Fukoku Mutual Life Insurance. "We have no reason to rush to buy JGBs now."
The MOF said last month it would issue an extra 16.9 trillion yen of JGBs this fiscal year to pay for economic stimulus, with the extra issuance due to come to the market starting in July. The yield on two-year debt edged down 0.5 basis point to 0.365 percent matching a three-month low first hit on Thursday.
The five-year yield fell 1.5 basis points to 0.805 percent.
The Ministry of Finance will sell 2 trillion yen (20.9 billion dollar) of five-year notes on May 19. The 20-year yield rose 2 basis points to 2.090 percent. The yield curve steepened, as a result.
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