Japanese government bond futures hit a one-month high on Friday, boosted by a sharp fall in Tokyo shares, while renewed expectations for a Federal Reserve rate cut this month raised doubts about the likelihood of a Bank of Japan rate hike this year.
Foreign players bought JGB futures in large amounts as the Nikkei share average dropped 1.7 percent to end at its lowest close in three weeks on Friday. Extended gains in futures forced investors to buy cash bonds, traders said, pushing the benchmark 10-year JGB yield down to a fresh one-month low.
"A rally in the JGB market this week is driven largely by futures movement that forced other players to adjust positions," said a senior manager at the bond investment division of a Japanese bank. December futures rose 0.33 point at 135.70 after climbing as high as 135.85, the highest since September 19.
Futures rose as much as 1.1 percent this week as they hit several key levels and triggered technical-driven buying, pushing higher towards a 19-month high of 136.41 hit last month.
Domestic investors hesitated to chase JGBs higher as no domestic data was due this session that would shed light on when the BOJ may raise interest rates from the current 0.5 percent. Caution remained ahead of a gathering of Group of Seven (G7) finance ministers and central bankers in Washington on Friday.
BOJ Governor Toshihiko Fukui said in Washington that his stance on monetary policy would not change after his meetings with Fed Chairman Ben Bernanke and International Monetary Fund Managing Director Rodrigo Rato ahead of the G7.
Asked if it would be difficult to carry out a rate hike by the end of the year, Fukui said the BoJ's policy-setting board would make a decision by weighing market conditions and the economy going forward. The benchmark 10-year yield fell 3.5 basis points to 1.600 percent, its lowest since September 20.
"Whether the 10-year yield falls and stays below 1.600 percent is important, because it suggests the market sees almost no chance of a BOJ rate hike by the end of the year or even by next March," said Katsutoshi Inadome, a fixed-income strategist at Mitsubishi UFJ Securities.
TRACKING TREASURIES:
JGBs drew support from US Treasuries, which rallied this week on a series of weak economic reports reinforcing expectations for a Fed rate cut later this month and disappointing earnings results from big US banks suggesting that credit tightness continues to hurt financial institutions.
The Fed cut interest rates by an aggressive half-percentage-point to 4.75 percent in September to shield the US economy from the slumping housing market and a global credit crunch. As the perceived chance of another Fed rate cut rose, investors became increasingly sceptical of a BOJ rate rise in December or even early next year.
Investors now see a roughly 50 percent chance the BOJ will raise rates in December, down from around 60 percent on Thursday, according to swap contracts on the overnight call rate They see a 65 percent chance of a hike by January, down from around 75 percent the previous day.
The two-year yield fell 4 basis points to 0.795 percent, a one-month low. The five-year yield dipped 3 basis points to 1.125 percent after falling as low as 1.115 percent, the lowest since September 19. The 20-year yield fell 2 basis points to 2.165 percent, while the 30-year yield was d basis points at 2.410 percent.