JGBs gain, five-year yield falls

Japanese government bonds gained and the five-year yield fell to a four-year low on Friday after Treasuries rallied and as the yen's rise to a seven-month high against the dollar helped stoke deflation worries. After recently lagging their shorter-dated counterparts the superlongs posted significant gains, as pension funds stepped into the market after the US Treasury yield curve bull-flattened the previous day on a robust 30-year bond sale.
The five-year/20-year yield spread tightened slightly, to 147 basis points from 146.5 basis points on Thursday. Midterm JGBs continued their bull run on persistent demand from domestic banks looking for a safe haven to park their funds, which they have in ample supply thanks to the Bank of Japan's easy monetary policy and slow lending growth. The dollar's drop below 91 yen to a seven-month low helped push Tokyo's Nikkei stock average lower and gave JGBs an extra lift.
"A strengthening yen adds to concerns over deflation, which in turn leads to expectations that the BOJ will have to stick to its easy policy for an extended period," said Genji Tsukatani, head of fixed income investment management at asset manager Schroders.
The two-year yield dipped 0.5 basis point to 0.205 percent, a fresh four-year low. The five-year yield dropped 2 basis points to 0.575 percent, its lowest since September 2005. Analysts said two- and five-year yields probably did not have much room to decline further but yields on longer-dated maturities might do so.
"It is still difficult to tell at this stage but a flattening bias on the curve could be retained if the market comfortably handles next week's 20-year auction, as the next superlong sale won't take place until October," said Shinji Ebihara, a quantitative analyst at Mizuho Securities.
"The rest will be up to how overseas bond markets and stocks move." Japan's Ministry of Finance will hold a 20-year JGB auction on Tuesday. The next superlong sale takes place on October 8 when the ministry holds the 30-year sale. Revised data showed Japan's GDP grew 0.6 percent in April-June from the previous quarter, against a median market forecast for a 0.9 percent expansion. It translated into annualised growth of 2.3 percent, down from an initial reading of 3.7 percent.
The economy pulled out of a full year of sharp contraction during the quarter. December 10-year JGB futures gained 0.22 point to 139.15. The benchmark 10-year yield fell 2 basis points to 1.300 percent. The 20-year yield declined 2.5 basis points to 2.045 percent. The 30-year yield also fell 2.5 basis points, to 2.190 percen.