Japanese government bond (JGB) prices bounced back sharply on Friday, with benchmark futures erasing losses made in the morning session, as market players covered short positions ahead of the weekend.
The sharp rebound wrapped up a week of jerky trading in which a rise in the benchmark 10-year JGB yield to a seven-year high on Tuesday was quickly followed by a buying spree on strong demand at a 30-year auction.
"There are many different views among investors on where Japan's interest rates are headed, so we are having such a volatile market," said Naomi Hasegawa, senior strategist at Mitsubishi UFJ Securities.
June futures rose as high as 132.78 in the afternoon, up 0.33 point on the day, reversing their fall in the morning to as low as 131.93, near a 5-1/2-year low of 131.75 hit last week.
The contract ended up 0.14 point on the day at 132.59.
It also finished the week higher, the first rise in seven weeks. JGB prices had been sliding much of this year on concerns about future rate hikes by the Bank of Japan.
While some investors think the BOJ could raise rates twice this year, with the first hike as early as July, others suspect the BOJ will end up moving much slower, given that the government wants a low interest rate to help it finance its huge public debt.
Traders said there was an abnormally large amount of buying in futures in the afternoon. Trade volume in the June contract topped 60,000 contracts, more than 1.5 times the average and the highest in 2 1/2 months.
Some traders said there was talk that a hedge fund was forced to buy back JGB futures, possibly after having made big losses in the metals market, such as gold and silver, which have fallen sharply since Thursday. There was no such fervent buying in cash bonds, leaving them mixed on the day.
The yield on the benchmark 10-year cash bond was up half a basis point to 1.905 percent at the futures' closing at 3:00 pm (0600 GMT), although it retreated from the day's high of 1.960 percent.
The 20-year yield was up 2.5 basis points at 2.285 percent while the 30-year yield was up 2.0 basis points at 2.460 percent. The five-year yield fell one basis point to 1.345 percent and the two-year yield rose half a basis point to 0.625 percent.
The 10-year yield hit a seven-year high of 2.0 percent earlier this week.
But since then Finance Ministry officials have shown their discomfort with rising JGB yields, saying that their recent rise was too rapid - a factor that some traders say has supported the market.
Market participants are keeping an eye on a meeting of the Group of Seven nations beginning in Washington on Friday, which will be its first gathering since the Bank of Japan ended its super-easy monetary policy last month.
Any new insight at the meeting from the BOJ's governor, Toshihiko Fukui, on when it may end its zero-interest rate policy could impact the market.
Analysts said trading could remain volatile next week, given the 20-year auction on Tuesday, as well as an offer of two-year notes on Thursday and consumer price data on Friday.
In addition, the BOJ will hold a one-day policy meeting on April 28 and release its twice-yearly outlook report on the economy and prices. While a rate rise is unthinkable next week, the bank's outlook report, especially BOJ board members' expectations on inflation, is seen as key for deciphering the central bank's thinking.
The benchmark December euroyen futures price slipped half a basis points to 99.320, indicating a three-month interbank rate of 0.68 percent in December, more than 50 basis points above its current level.