JGB yields plumb new lows

Japanese government bonds extended gains, pushing benchmark yields to a 9-year low on Friday, on continuing unease about Europe's debt crisis and rekindled fears of a Chinese slowdown. Spain's borrowing costs have surged this week on worries it may need to issue more debt to recapitalise its banks, prompting investors to seek to the safety of fixed income assets, including JGBs.
Stocks tumbled after China's official purchasing managers' index piqued worries about its economy. The index fell more than expected in May to the weakest reading this year. "JGB futures buying accelerated as stocks dropped, and this carried over into cash bonds in the afternoon," said a fixed-income fund manager at a Tokyo asset management firm.
The 10-year JGB futures contract ended up 0.21 point at 143.82 after rising as high as 143.90, the highest level for the front-month contract since October 2010. In the exchange-listed options market, a relatively large volume of call options traded with strikes at 144.50, as investors bet on or hedged against a further rise in futures. The benchmark 10-year JGB yield fell 1.5 basis points to 0.810 percent, after dropping to 0.805 percent, its lowest level since July 2003.
The five-year JGB yield dropped half a basis point to 0.200 percent, after earlier falling to 0.195 percent, its lowest level since June 2003. Underpinning demand for bonds, Japan's Nikkei stock average shed 1.2 percent, rounding out its ninth straight week of losses for its longest losing streak in two decades. The superlong sector was left out of the gains after benefiting in the previous session from month-end buying by pension funds and other investors seeking to extend the duration of their portfolios. The 30-year bond yield was flat at 1.775 percent, after dropping to 1.765 earlier, while the yield on the 20-year bond was flat at 1.620 percent.
JGB auctions in the coming weeks will help gauge investor appetite for bonds with yields hovering around historically low levels. The finance ministry will offer 10-year notes on Tuesday and 30-year bonds on Thursday. "The 10-year yield is likely to rise ahead of the auction, so a test of 0.8 percent resistance is not expected before then," said Keiko Onogi, senior JGB strategist at Daiwa Securities. The cost of insuring against a Spanish default hit 600 basis points for the first time on Thursday and the country's 10-year debt yield remained at well above 6 percent.