Japanese government bonds advanced on Friday, pushing the benchmark 10-year yield down to a 3-1/2 year low, after the Bank of Japan cut interest rates closer to zero. The Japanese central bank cut its overnight call rate target to 0.10 percent from 0.30 percent on Friday in a bid to help a battered economy struggling with a credit crunch, falling prices and an appreciating yen.
The BoJ also cut the Lombard lending rate to 0.30 percent from 0.50 percent, said it would temporarily purchase commercial paper and increase the amount of JGBs it buys outright from the market. Outright JGB purchasing will rise to 1.4 trillion yen ($15.70 billion) per month from 1.2 trillion yen and will include 30-year maturities, 10-year inflation-indexed JGBs and 15-year floating-rate bonds.
"The BoJ's to include inflation-indexed and floating-rate bonds for its outright purchases is a positive for JGBs," said Koji Ochiai, a senior market economist at Mizuho Investors Securities. "It was more than the market had bargained for," said Ochiai.
March 10-year JGB futures climbed 0.27 point to 139.68, paring losses suffered earlier amid jitters before the BoJ's rate announcement. "It appears that hedge funds built up long positions in the futures after the BoJ move, in anticipation of investors building curve flattening positions that involve selling shorter-dated cash JGBs and buying long-dated bonds," said a trader at a Japanese trust bank.
The 10-year benchmark yield dropped 3.5 basis points to 1.225 percent after touching 1.210 percent, the lowest since July 2005. Yields declined across the curve, with analysts saying the BoJ's decision to increase the amount of JGBs it buys outright added to the flattening pressure.
The 20-year yield fell 4 basis points to 1.915 percent and the 30-year yield plunged 7 basis points to 2.025 percent. Expectations that the BoJ would cut interest rates during a two-day policy board meeting ending on Friday were boosted mid-week when the US Federal Reserve conducted a bigger than expected cut to near zero.
The yen's surge to a 13-year high against the dollar this week also fuelled expectations of a rate cut. Market watchers said deteriorating economic conditions, falling prices and easing policies undertaken by the world's major central banks overwhelmingly point towards lower interest rates going forward.
The focus is now on whether such debt-supportive factors can help the JGB market absorb an expected increase in issuance as Japan gears to borrow more heavily to make up for tax revenue shortfalls and looks to compile stimulus packages to help an economy in recession. The two-year yield slipped 3.5 basis points to 0.425 percent after going as low as 0.385 percent, lowest since February 2006. The five-year yield also fell 3.5 basis points, to 0.745 percent.