Japanese government bond futures hit a two-month low on Friday, hurt by a weaker yen, higher share prices and questions about new finance minister Naoto Kan's commitment to fiscal discipline. Caution ahead of US jobs data due later in the day also weighed on JGBs, helping push the 10-year JGB yield to a two-month high as participants trimmed or closed out positions before the closely watched event.
JGBs have retreated over the past few weeks as the dollar has risen against the yen and Tokyo stocks have climbed to 15-month peaks, buoyed by economic indicators that strengthened hopes for a steady recovery in the United States.
"That trend has not changed," said Shinji Nomura, chief bond strategist at Nikko Cordial Securities. "Issues related to fiscal policy have been a recurring theme, but they are being rekindled again," Nomura continued.
Supply is one of key market themes for JGBs as Japan, with its debt approaching 200 percent of GDP, is the most indebted industrialised nation.
Concern over supply temporarily went onto a low boil after the government announced JGB issuance plans for the fiscal year starting in April that were in line with market expectations.
But it has resurfaced again as Kan stirred doubts by saying on Thursday he would be open to spending more in the future if the economy weakens. Nomura at Nikko Cordial Securities added that while he did not find Kan's remarks on Thursday regarding fiscal policy particularly surprising, they helped refocus attention on fiscal policy.
Traders said rises in long-term and superlong interest rate swap rates since Thursday were also hurting JGBs. Ten-year and 20-year yen interest rate swap rates both rose to two-month highs on Friday, while the difference between two- and 10-year swap rates hit a three-year high earlier this week.
Many economists expect to see the first month of US jobs growth in two years when the December data is released later on Friday. A weaker yen has slightly eased concerns towards deflation, one of the factors that has kept JGB yields relatively low despite rising issuance.
March 10-year futures fell 0.19 point to 138.72 after hitting 138.56, their lowest since mid-November. The five-year yield rose 1.5 basis points to 0.515 percent. The benchmark 10-year yield climbed 2 basis points to 1.360 percent after brushing 1.365 percent, its highest in two months.
The 20-year yield edged up 0.5 basis point to 2.155 percent after hitting 2.165 percent. The five-year/20-year yield spread reached 165.5 basis points, its highest since late 1999, before pulling back to 164 basis points. Tokyo's Nikkei stock average rose 1.1 percent to a 15-month high, buoyed by the weak yen.
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