Japanese bonds extend losses

Japanese government bonds fell on Friday after a deal on measures to fight Europe's financial crisis sparked relief rallies in riskier assets and dented appetite for safe-haven government debt, pushing the benchmark yield to its highest in two months. But losses in short-term cash bonds were limited as they were supported by the Bank of Japan's decision to boost its asset purchases.
The 10-year JGB yield climbed 3 basis points to 1.040 percent, its highest since September 5. "JGBs are taking cues from a surge in US benchmark yields and the Nikkei rising above 9,000. People are adjusting positions as fears have eased of the eurozone debt crisis causing a sharp slowdown in economies," said a trader at a Japanese bank.
December 10-year JGB futures were down 0.40 point at 142.12, after falling as far as 142.11, their lowest since last Tuesday. Charts were showing bearish signals as the upper-end of the daily Ichimoku cloud has become resistance since mid-October.
Selling of JGB futures from short-term players who trade on charts and broker hedging ahead of a 2.2 trillion yen ($29 billion) 10-year JGB auction on Tuesday were weighing on the overall JGB market, traders said. The deal in Europe calls for private banks and insurers to take 50 percent losses on their Greek debt and for a leveraging of the bloc's rescue fund.
While the agreement is unlikely to solve all Europe's financial problems, the clear signs of progress, combined with healthy US third-quarter GDP data lifted risk appetite. European shares on Thursday climbed to a 12-week high and Wall Street stocks jumped 3 percent. The Nikkei stock average on Friday gained more than 1 percent to above the 9,000 level for the first time in two months.
But market participants doubt JGB yields have room to rise significantly from current levels as the BoJ is likely to keep to its monetary easing stance for a while. The BoJ eased policy on Thursday by boosting purchases of government bonds, warned of risks posed by a strong yen, and cut its growth forecasts. Losses in two-year JGBs were limited, with its yield inching up 0.5 basis point to 0.145 percent, helped by the BoJ's decision on asset purchases.
The yield curve steepened as the spread between two- and 10-year yields grew to 89.5 basis points, its widest since September 2. "It is possible for the 10-year JGB yield to rise further but not clearly above 1.2 percent unless the US economy provides strong data and the 10-year US yield clearly breaks above 2.5 percent," said the trader, adding that the market will focus on US economic data for the rest of the year.
The longer-term outlook for eurozone sovereign debt also remains vulnerable as the EU still needs to find the money for the newest version of its bailout fund, with doubt lingering whether its new size of around 1 trillion euro will actually be enough to contain the crisis.