Japanese bonds jump

Japanese government bonds jumped on Friday as investors rushed to the safety of bonds from equities on fears that the global economy may be sputtering and that policy options to support it could be running out. A massive fall in US shares on Thursday was fanning concerns about the US economy, and some market players were starting to worry that recession could not be ruled out.
"The market is gripped by the anxiety that the world economy is sliding into a crisis just like three years ago. The world contained that crisis by essentially transferring losses to the government. The same problem is rearing its ugly head," said Mitsuru Saito, chief economist at Tokai Tokyo Securities. Ten-year JGB futures rose 0.12 point to 142.33.
The 10-year cash bond yield dropped as far as 0.985 percent - its lowest in nine months - before stepping back, on profit-taking, to 1.005 percent, down 1.0 basis point on the day. The fall, however, pales in comparison to a 21 basis points drop in US bonds with the same maturity on Thursday as investors were cautious about pushing the 10-year JGB yield deep below one percent.
In a sign that investors see limited room for yields to drop, selling of call options with strike yields below one percent was popular, a trader at a European brokerage said. That helped to depress implied volatility on futures call options to around 2.6 percent , its lowest in about two months. Still, as investors are increasingly worried about faltering growth, rather then inflation, investors flocked to the very long end of the yield curve, such as 20- and 30-year bonds.
The economy seems to be running out of gas after the Fed wound down QE2. And you can't expect stimulus from fiscal policy, and US stocks fell even after they had a debt ceiling deal. The 20-year yield bond yield fell 0.5 basis points to 1.755 percent, having dropped to a 10-month low of 1.710 percent at one stage. The 30-year bond yield declined 1.0 basis point to 1.900 percent, hitting a ten-month low of 1.855 percent at one point.
Both yields marked their biggest weekly fall since September last year as a wide range of domestic investors from banks and life insurers to pension funds rushed to the sector. The five-year bond yield fell 1.5 basis point to 0.335 percent. JGB yields could drop further if US payroll data due at 1230 GMT on Friday shows recovery in the jobs market is losing momentum and fuels speculation that the Federal Reserve may follow the path of the Swiss and Japanese central bank in taking easing steps.
With fiscal stimulus seen as out of reach due to a drive for fiscal tightening, monetary policy is seen as the only option. But some market players question whether the Fed could take new measures just one month after it finished its asset purchase programme, which was controversial enough both at home and abroad for stoking inflation.