Japanese government bonds tumbled on Friday, with futures hitting two-week lows as stocks jumped on news that US President George W. Bush will propose reforms to help homeowners with subprime mortgages avoid default.
US Treasuries also fell in Asia. A quarterly book-closing for US securities houses and some hedge funds may have spurred selling, while some players sought to cover their month-end cash needs.
JGB yields have touched multi-month lows over the past couple of weeks as concerns about worsening credit markets prompted investors to flee stocks for bonds, and raised doubts about a Bank of Japan interest rate hike as early as next month.
Traders have said the rally had pushed JGB yields too low in light of economic fundamentals. Data on consumer prices and the labour market out earlier this session showed Japan's economic recovery remained on track.
"JGB prices have currently reached a high level valuation-wise, in view of fundamentals," said Nhan Ngoc Le, a Japan interest-rate strategist at ABN AMRO.
"As concerns about credit markets ease, it's natural that a correction is led by a highly liquid market such as futures, which have been overvalued," he said, adding trend-following CTAs (commodity trading advisors) may have also been selling as the market turned around. September 10-year futures ended the session down 0.46 point at 135.35 after hitting the day's low of 134.96, the lowest in two weeks. Futures rose as high as 136.01 earlier.
The benchmark 10-year yield soared 5 basis points to 1.615 percent, after earlier matching an 18-month low of 1.540 percent hit last week, the lowest since before the Bank of Japan ended its super-loose quantitative easing policy in March 2006.
The five-year yield jumped 5.5 basis points to 1.175 percent, after falling to intraday lows of 1.100 percent, which was near an 11-month low of 1.080 percent hit last week.
The two-year yield rose 3.5 basis points to 0.880 percent, also off the day's low of 0.825 percent, near a four-month low of 0.810 percent hit two weeks ago.
The Nikkei average jumped 2.6 percent to 16,569.09.
The sharp rise in stocks prompted players to further unwind long positions before the weekend and the month-end.
The risk of a credit squeeze stemming from rising defaults on subprime mortgages has fuelled worry that consumers will trim spending at a rate that could tip the US economy into recession.