Japanese government bond futures extended their losses late on Friday as stocks rose on news that Bank of America had obtained government aid to help the bank absorb Merrill Lynch. JGB futures had edged lower initially and retreated from four-month highs hit the previous day, as US Treasuries took a breather in US trading on Thursday following a rally earlier in the week.
The decline in JGB futures picked up some steam in the afternoon, after US officials said Bank of America Corp would receive $20 billion in fresh government cash and a federal backstop against $118 billion of bad assets to help the bank absorb Merrill Lynch & Co.
"Stocks rose and that provided the impetus for the fall," said Akito Fukunaga, a fixed-income strategist for Credit Suisse, adding that profit-taking interest in JGBs had been strong to start with. March 10-year JGB futures fell 0.32 point to 139.73, retreating from a four-month high of 140.19 hit on Thursday.
The benchmark 10-year JGB yield rose 1.5 basis point to 1.220 percent. The 10-year yield hit a five-year low of 1.155 percent in December, when JGBs rallied after the Bank of Japan lowered interest rates to 0.1 percent and unveiled other steps such as an increase in its monthly outright purchases of JGBs.
The yield curve steepened as yields on 10-year bonds rose while two-year yields fell. Two-year yields fell 1 basis point to 0.360 percent, edging back towards a three-year low of 0.355 percent hit earlier this week. The drop in two-year yields came as JGB repo rates fell after rising earlier in the week.
One-day spot/next repo rates dropped to roughly 0.17 percent, down from about 0.23 percent on Thursday, said a trader for a Japanese money broker. Repo rates had risen earlier in the week partly because banks curtailed lending via JGB repos before the end of a reserve maintenance period on Thursday.
But with that factor out of the way, repo rates fell sharply starting early on Friday, the trader said, adding that this week's increase in the BOJ's JGB repo operations was another factor contributing to the dip in repo rates.
The BOJ offered to supply a total of 5 trillion yen to the money market via JGB repos on Friday for the third straight day. The central bank has increased the daily offer amount of its JGB repo operations compared with 3 trillion yen last Friday.