The five-year Japanese government bond yield hit a three-year low on Friday, a day after the Bank of Japan sharply lowered its growth outlook, while the Nikkei share average's drop to a two-month low lifted JGB futures. But longer-dated bonds stayed under selling pressure after the BOJ said on Thursday it would buy 900 billion yen ($10.1 billion) per year of JGBs with maturities longer than 10 years in its outright JGB buying, less than the market had expected.
A rise in longer-dated US Treasury yields also prompted players to dump longer-dated bonds in Tokyo. "The yield curve steepened as weaker share prices also supported the mid-term sector, while longer-dated bonds continue to suffer on Treasuries and the BOJ's plan," said Hidenori Suezawa, chief fixed-income strategist at Daiwa Securities SMBC.
March futures were up 0.17 point at 139.81. The lead futures contract dipped in early trade as the market took its cue from an overnight fall in US Treasuries. The contract quickly recovered losses as Japanese share prices plunged, with the Nikkei ending down 3.8 percent at a two-month closing low of 7,745.25.
But the Nikkei's slide did not spark a rally in the broader bond market as it stoked concerns that slumping share prices would further damage investors' overall portfolios, prompting them to trim holdings, including those of safe-haven JGBs. Most Japanese companies end their business year on March 31.
The benchmark 10-year yield was unchanged on the day at 1.230 percent. The five-year yield slipped 1.5 basis point to 0.660 percent, its lowest since September 2005. As expected, the central bank left the overnight call rate target at 0.10 percent on Thursday at the end of a two-day policy meeting. The central bank said the economy would likely shrink 1.8 percent in the fiscal year to March 31 and contract 2.0 percent the following year, down from its forecasts issued in October for growth of 0.1 and 0.6 percent, respectively.
The revision prompted expectations that it will be a long time before Japan's key policy rate is raised again. The two-year yield rose 0.5 basis point to 0.360 percent, staying above a three-year trough of 0.345 percent reached earlier this week. "Investors find it difficult to chase two-year notes as repo rates remain high despite steps the BOJ has been taking to ease monetary policy," said Atsushi Ito, a JGB strategist at Morgan Stanley.
The Tokyo repo rate, a reference rate authorised by the BOJ, shows the one-day spot/next JGB repo rate stood at 0.199 percent on Friday. That was slightly down from 0.206 percent the previous day, but above 0.178 percent late last week. The BOJ said on Thursday it would buy corporate bonds to ease an increasingly severe funding squeeze. The 20-year yield rose 2.5 basis points to 1.865 percent and the 30-year yield climbed 2 basis points to 1.920 percent.