Japanese government bond futures jumped to their highest level in more than two months on Monday as turmoil in global equity and credit markets prompted investors to seek the safety of government debt. September futures surged 0.55 point to 133.97, the highest since late May.
After Treasuries rose late last week on persistent worries about problems in the US subprime market. Such concerns battered US stocks then and Standard & Poor's 500 index and the Nasdaq Composite Index on Friday posted their worst one-day percentage drops since a global sell-off in equities in late February.
"A sell-off in global shares and a fall in US Treasury yields prompted flight-to-quality buying of JGBs, as well as some speculative bond buying," said a senior trader at a European brokerage.
"But many investors are careful about chasing JGBs on expectations that the Bank of Japan could raise interest rates later this month or in September," the trader said. JGB futures ended the regular session 0.36 point higher at 133.78. The lead futures contract eased from a session high as the Nikkei share average trimmed early losses.
The Nikkei ended down 0.4 percent at 16,914.46 after falling more than 1 percent. The benchmark 10-year yield dropped 3 basis points to 1.750 percent after sliding as low as 1.730 percent, the lowest level since late May.
Analysts said they were concerned that the 10-year yield in the mid-1.70 percent region would be too low if the BOJ lifts overnight rates by 25 basis points to 0.75 percent at a policy meeting on August 22-23.
The two-year yield fell 2 basis points to 0.960 percent after striking a two-month low of 0.955 percent. The five-year yield bumped down 4 basis points to 1.300 percent after hitting a two-month trough of 1.290 percent. The 20-year yield was down 2.5 basis points at 2.160 percent.
March euroyen futures rose 2.5 basis points to 99.010, off a two-month high of 99.020 hit in early trade. Worries about mushrooming problems in the US mortgage market have sparked a sell-off in global stock and credit markets in past months.
The latest reminder of the upheaval in credit markets came in the form of comments from a top official at Bear Stearns Cos. on Friday who said fixed-income market conditions were at their worst in 22 years.
The statement came as ratings agency Standard & Poor's changed its outlook on the investment bank to negative given that the firm's subprime hedge funds have racked up heavy losses, which helped to batter US stock prices. Given recent volatility in global markets sparked by the US mortgage turmoil, market participants say the BOJ will be extra cautious in deciding whether to lift interest rates.
Swap contracts on the overnight call rate show roughly a 53 percent chance of an August rate rise, down from around 60 percent on Friday. "A big factor for the BoJ will be whether the subprime issue calms down, or whether it will continue to worsen," said Naomi Hasegawa, senior fixed income strategist at Mitsubishi UFJ Securities.
Subprime concerns had overshadowed US government data on Friday showing that employers added 92,000 new jobs last month, the slowest rate in five months. Meanwhile, the unemployment rate rose to 4.6 percent in July.
Other market events this week include an auction of 10-year inflation-linked JGBs on Tuesday, as well as a five-year note offer on Thursday. In addition, the Federal Reserve will hold a policy meeting on Tuesday. The US central bank is expected to hold rates at 5.25 percent, but analysts said that any suggestion that policymakers are getting jittery about subprime issues may spark more selling in stocks and credit, which would further boost bonds.