Japanese government bonds (JGBs) fell on Friday, surrendering earlier gains in response to a New York Times report that the US government was considering taking over mortgage lenders Fannie Mae and Freddie Mac.
Earlier, September futures rose to a two-month high and the benchmark 10-year yield declined to a two-month low as persisting credit jitters and sagging Tokyo shares prompted investors to continue seeking the safety of government debt. But the bond market was blind-sided when the New York Times reported on its online edition that the US government was mulling the take-over of the troubled mortgage lenders.
The New York Times report comes amid deepening concerns about the US mortgage lenders' ability to raise capital needed to purchase home loans, which caused their shares and bonds to tumble on Thursday.
The report momentarily, rejuvenated the Nikkei share average which had been languishing in negative territory, triggering a rebound that pushed bond prices down to intraday lows. September futures stooped to a low of 135.58 before edging back to 135.99, down 0.11 point. The contracts initially rose as far as 136.42, a two-month high.
The 10-year yield spiked to 1.625 percent before steadying at 1.600 percent, 2.5 basis points higher. It fell as far as 1.555 percent, a two-month trough. Some calm eventually returned after market participants were able to more closely scrutinise the New York Times report.
"The article makes no mention of actual steps being finalised, and it is unlikely to weigh on bonds or support equities in the long term," said Naomi Hasegawa, a senior fixed-income strategist at Mitsubishi UFJ Securities. "But Freddie Mac and Fannie Mae will remain key themes for the JGB market, which will be dictated by US events, such as earnings results of US financial institutions and Bernanke's testimony," she said.
Federal Reserve Chairman Ben Bernanke is to deliver his semi-annual testimony to Congress on July 15 and 16. "The market is swayed by overseas factors, making investors hesitant to sell JGBs even when we are missing strong domestic factors to rationalise a further fall in the yields," said Keiko Onogi, a senior JGB strategist at Daiwa Securities SMBC.
Longer-dated bonds have been supported by constant buying by life insurers, helping the 10-year yield come down sharply from 1.895 percent hit in mid-June, its highest since July 2007.
Nippon Life, Japan's biggest life insurer, told Reuters on Thursday it increased its JGB holdings by 100-200 billion yen ($934.9 million-$1.87 billion) in the April-June first quarter of the current business year. "There were good buying opportunities both for 10- and 20-year bonds when taking a one-year horizon, so we made the investment earlier than we had planned," said Nippon Life.