The Japanese government bond (JGB) yield curve flattened on Friday, with super-long yields dipping as selling pressure from a week-long sell-off driven by issuance concerns eased slightly.
A wait-and-see mood prevailed as the market awaited details of a meeting between Japan's Ministry of Finance and JGB primary dealers later in the day, watching for any mention of a potential supply increase for this fiscal year and how it may be allocated along various maturities.
The yield curve flattened, with the five-year/20-year yield spread pulling back from a four-year high, as super-long JGBs were bought back due to an easing of paying pressure in the yen interest rate swaps market.
"The shape of the yield curve changed mostly on curve trades, but the market appeared neutral in overall terms," said Takafumi Yamawaki, a senior interest rates strategist at BNP Paribas Securities. Through curve trades market players take opposite positions in different maturities hoping to profit from either a steepening or a flattening of a bond yield curve.
The JGB curve had steepened until Thursday, partly because super-long 20- and 30-year yields were tugged higher by strong paying in swaps, which in turn was led by funds speculating on the curve steepening in the wake of an expected increase in bond issuance.
But the paying pressure in swaps subsided on Friday as the market underwent a correctional phase, allowing bargain hunters to pick up cash superlong bonds.
The five-year/20-year yield spread tightened to 146.5 basis points from 150 basis points on Thursday, which was the widest since August 2005. December 10-year futures fell 0.07 point to 138.31 after pulling back from a two-month low of 138.14.
The JGB market has been on the back foot this week, hurt by lingering concerns over a likely issuance increase for the year to March 2010 and uncertainty over the government's spending plans for next fiscal year. The likelihood of added issuance for the current fiscal year through March - with the market bracing for planned new JGB issuance to be upped to around 50 trillion yen ($548 billion) from 44 trillion yen to plug an expected 6 trillion yen tax revenue shortfall - sent the benchmark 10-year yield more than 10 basis points higher from an eight-month low of 1.240 percent hit earlier in the month.
But some investors were willing to pick up bonds on price dips with yields rising to or above recent thresholds, market players said. "There has been quite an amount of bargain hunting, particularly for longer-dated maturities, which has been drowned out by the overall market drop," said Keiko Onogi, a senior JGB strategist at Daiwa Securities SMBC.
The five-year yield climbed 1 basis point to 0.650 percent, while the benchmark 10-year yield was unchanged at 1.360 percent after hitting a two-month high of 1.370 percent. The 20-year yield fell 2.5 basis points to 2.115 percent and the 30-year yield dropped 3.5 basis points to 2.265 percent, helped lower by bargain hunting from domestic life insurers.
The market is also looking to the meeting between the MOF and market participants for any mention of JGBs for retail investors, 10-year inflation-linked JGBs and 15-year floating rate bonds. The MOF is expected to up the amount of JGBs it sells to institutional investors for the current fiscal year through March 2010 to offset weak sales of JGBs for retail investors, which have seen their popularity drop due to their modest returns.
The Nikkei business daily said on Friday that the ministry may decide to continue holding back on the issuance of linkers and floaters. These instruments faced a sharp sell-off in the wake of the global financial turmoil a year ago, and the ministry has had to buy back outstanding issues to prop up these markets.
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