Japanese government bonds rose on Friday as a drop in shorter bond yields on expectations the Bank of Japan would step up ample funding operations prompted dealers to buy back futures. Traders sold futures earlier in the day when the Nikkei share average rose as high as 5 percent, while an overnight drop in US Treasuries sapped investor demand in longer-dated bonds.
Shorter-dated paper outperformed in the morning when other sectors were pulled down by the Nikkei's rebound, and that firmness spread to other parts of the yield curve as the BOJ's aggressive funding operations raised hopes that tightness in the JGB repo market will gradually ease, traders said.
Tightness in the JGB repo market kept upward pressure on rates for commercial paper and treasury bills, making investors wary of buying shorter- to medium-term JGBs.
"Firmness in the medium-sector helped futures erase losses, after dealers brought back futures since they saw the heavy selling earlier in the day as overdone," a senior dealer at a big Japanese bank said.
December 10-year JGB futures ended the day session up 0.15 point at 138.37 after moving between 137.60 and 138.53. Volume picked up to 27,570 contracts. The Nikkei gained 2.7 percent, snapping a three-day losing run, as a rally in US stocks triggered short covering.
The 10-year yield was flat at 1.490 percent, after moving between 1.475 and 1.515 percent. The 20-year yield rose 1.5 basis points to 2.140 percent. The two-year yield fell 2.5 basis points to 0.545 percent while the five-year yield fell 2 basis points to 0.880 percent.
Traders said ample funding operations by the BOJ over the past couple of days had raised speculation about beefed-up attempts by the central bank to ease tightness in the JGB repo market and help ease year-end funding demand.
The BOJ pumped in a total of 3 trillion yen ($30.69 billion) for "term" funding in the morning, to start on Tuesday. On Thursday, the BOJ took aggressive funding operations to start on Monday, the first day of the new monthly reserves maintenance period, when a temporary scheme in which interest will be paid on excess reserves at the central bank will take effect. The BOJ offered cash for one-week, three-month and one-day repo agreements. Rates on the BOJ's repo operations eased slightly from similar operations on Thursday, helping to bring repo market rates down to around 0.45 percent from 0.47-0.49 percent earlier in the week, traders said.
The BOJ also drained cash in two same-day operations as Friday is the last day of the monthly reserves maintenance period, when overnight call rates tend to ease later in day from the 0.3 percent BOJ policy target.
"The operations over the last two days suggest the BOJ will supply ample funds for the year-end to contain repo rates and keep the overnight call rate near its target," said Shinsuke Kanabu, joint general manager at Central Tanshi. Kanabu doubted if the BOJ would let call rates fall below the target just yet.
"The BOJ has just cut rates and I would think the bank would want to wait to see the effects for a while," he said. Money market traders said the operations appear aggressive in size but part of the funds are aimed at rolling over previous operations that start to settle next week.
While the market still has not priced in another rate cut by the end of the fiscal year next March, caution remains. "The market is still generally seeing rates on hold for a while, but players aren't completely ruling out the risk of further policy steps, whether a rate cut or other measures, by March," said Naomi Hasegawa, a senior fixed-income strategist at Mitsubishi UFJ Securities.