Japanese government bond futures extended gains on Friday as declining Tokyo shares supported safe-haven demand for government debt and offset the impact from a slump in US Treasuries overnight. A bigger-than-expected drop in machinery orders in December and a drop in a diffusion index of a survey of services sector workers kept intact worries about Japan's growth prospects, also aiding JGBs.
Dealers said short-covering pushed cash bond yields lower, particularly in short- to medium-term sectors, partly on lingering speculation that Saturday's Group of Seven meeting of finance officials could yield joint action to ease concerns about a possible US recession and credit market problems. "It's quite rare for the JGB market not to follow US Treasuries, making me suspect that price moves are being driven more by short-covering and the need to balance portfolio allocations than fundamentals," said Tomoyuki Arima, general manager of JGB trading at Tokai Tokyo Securities.
"Fears about the G7 meeting producing a surprise, such as a concerted action, are probably prompting some investors to buy the shorter end of the curve," he said.
March 10-year JGB futures ended the day session up 0.11 point at 137.95 after falling by as much as 0.41 point earlier in the day. JGB futures dropped initially after US Treasuries fell sharply on Thursday due to a dismal $9 billion auction of 30-year government bonds and a recovery in US shares.
The benchmark 10-year JGB yield fell 1 basis point to 1.415 percent off an intraday high of 1.450 percent. The two-year yield fell 2.5 basis points to 0.550 percent while five-year yields shed 3 basis points to 0.860 percent. The benchmark Nikkei average fell 1.44 percent. Japanese markets will be closed on Monday for a public holiday.
The G7 gathering of finance ministers and central bankers in Tokyo on Saturday was unlikely to dispel uncertainty over the prospects of rescue plans for US bond insurers and may have a limited impact on JGBs, said Akitsugu Bandou, senior strategist for Okasan Securities. It is hard to think that the Bank of Japan will face any strong pressure at the G7 to ease monetary policy, Bandou said.