TOKYO: Japanese government bond prices came off their highs on Thursday as a regional stock market rally led investors to turn to riskier assets, bringing the benchmark 10-year yield up from a seven-week low.
JGBs were firm for most of the session as the continued debt crisis in Europe and fears about slowing global growth fueled demand for safe-haven assets.
A late spike in the Shanghai Composite Index, which jumped nearly 3 percent on speculation that authorities prop up shares, sparked a broader risk rally that weighed on bonds.
Cash bond trading was relatively thin ahead of the end of the Japanese half-year. Some investors said pension funds could step up purchases of superlong bonds to extend the duration of their portfolios, while others said such buying might have already run its course.
"I think that finished yesterday, but there are still bits and pieces left," said Shogo Fujita, chief Japan bond strategist at Bank of America Merrill Lynch.
"We have seen active pension and life insurance companies in the last week or so come into the market, and have seen 10/20's flatten quite considerably, so I think the month-end buying has already played out and it's already affected markets," he said.
But late in the session, the yield curve steepened as the risk rally led investors to shed longer maturities.
The yield on the 20-year note added 1 basis point to 1.645 percent, while the 30-year yield rose 1 basis point to 1.890 percent after earlier dropping to a three-week low of 1.870 percent.
Benchmark 10-year JGB futures ended flat at 144.10 after briefly dipping into negative territory in the afternoon. In the morning session, they rose as high as 144.25, their loftiest level since August 7.
The yield on the current 10-year cash bonds fell half a basis point to 0.775 percent after earlier falling to 0.770 percent, its lowest level since August 9.
JGBs initially tracked firmer US Treasuries prices after protesters in Greece and Spain took to the streets to oppose unpopular austerity measures.
In Greece, international lenders continued to struggle to come up with a plan to restructure that country's debt.
"There is concern that even the easy monetary policies in the US and Europe won't be enough to turn around slowing growth, and of course there are fears about Spain and Greece," said a fixed-income fund manager at a Japanese trust bank.
"There is also a perception that the Bank of Japan is lagging the US and Europe in easing, meaning that investors here expect more easing to come, sooner or later," he said.
Strategists at Credit Suisse said on Thursday that they expect the 10-year JGB yield to trade in a range of 0.70 percent to 0.95 percent in the October-December 2012.
"We see little reason to aggressively take long positions, with yields now near the low end of our forecast range, and think it best to hold back enough in reserves to step up weakness buying when yield increases gain momentum," they said in a note to clients.
A two-year auction proceed smoothly as expected, as the Bank of Japan now buys much of the issuance of that maturity through its asset purchase programme.
The lowest accepted price at the Ministry of Finance's sale of 2-year notes was 100, and the bid-to-cover ratio was a robust 11.39, though down from 12.62 at the previous sale. For the tenth straight 2-year sale, the coupon was set at 0.1 percent, matching the interest the central bank pays on its current account excess reserves.
The latest 2-year JGB was untraded on Thursday, with its yield at 0.095 percent.
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