Japanese government bond futures tumbled to a five-week low on Friday, tracking this week's sell-off in US Treasuries after the Federal Reserve's aggressive half-point interest rate cut fanned worries about inflation.
Long-term Treasury yields have soared as the Fed's rate slash, combined with a surge in oil prices to record peaks and the dollar's tumble to a record low against the euro, has stirred fears that inflation will accelerate in the United States.
"This is mainly because of the reaction to the Fed rate cut," said Kenro Kawano, an interest-rate strategist at Credit Suisse. "The rise in inflation expectations is a global one. It's not good news for long-term yields."
JGBs have been at the mercy of the moves in Treasuries as investors and the Bank of Japan look for signs of how much the credit market crunch will hurt US growth and have a knock-on impact on the domestic economy.
December 10-year futures dropped 0.60 point to 134.70 and fell as far as 134.44, the lowest since mid-August.
The benchmark 10-year yield jumped 5 basis points to 1.675 percent, up 13.5 basis points on the week, and reached a five-week high of 1.700 percent.
Twenty-year bond yields climbed 4.5 basis points to 2.205 percent, while five-year yields surged 6 basis points to 1.210 percent.
Two-year yields rose 3.5 basis points to 0.840 percent, lagging the spike in long-term rates as the yield curve steepened further. The JGB market will be closed on Monday for a national holiday.
The spread between two- and 10-year yields widened slightly to 83.5 basis points, the widest since late July.
The market was also smarting in the wake of a weak auction of 20-year bonds on Thursday that left dealers saddled with more of the issue than they had wanted.
Data on Thursday from the Japan Securities Dealers Association showed foreign investors bought a record 3.8370 trillion yen ($33.1 billion) of bonds in August, even as Japanese city banks, insurers and agricultural institutions were net sellers.
Market players said the surge in commodity prices could lead to a pick-up in price pressures in Japan as well, with core consumer prices having been stuck near zero for much of the past year.
"The global bond market is reacting to the decision of the Fed," said Naruki Nakamura, a portfolio manager who oversees 400 billion yen ($3.5 billion) of JGBs at Fischer Francis Trees & Watts in Tokyo.
"Japanese inflation is partly influenced by commodity prices. It will be affected," Nakamura said. US crude oil prices dipped in Asia but held near the all-time peak of $84.10 a barrel hit the previous day, while the Tokyo Commodity Exchange's index of commodity prices has surged 12 percent in the past month.
Reflecting the risk of higher inflation, the spread between yields on regular 10-year JGBs and that on inflation-indexed JGBs swelled to 37.8 basis points on Friday and has widened by over 6 basis points in the past three days.