Japanese government bonds stood little changed on Friday as a rebound in Tokyo share prices curbed investors' demand for safe-haven debt.
Market participants took the Nikkei average's 1 percent bounce as a cue to take profits in early trade after JGB yields had fallen to two-week lows on Thursday, when bonds gained amid disappointment over a US banking sector bailout plan unveiled earlier in the week. But, JGBs' later erased losses on prevailing bleak prospects for the Japanese economy.
Preliminary, gross domestic product data for October-December out on Monday is expected to show Japan's worst economic performance since the first quarter of 1974.
Economists polled by Reuters expect Japan's economy to have shrunk by 3.1 percent in the fourth quarter of 2008, or an annualised 11.7 percent, as shock waves from the global financial crisis ripped through the export-driven economy. Many market participants kept to the sidelines after Thursday's rally and ahead of next week's events, confining JGB prices to a narrow range.
"The market is taking a bit of a breather after yesterday's big moves. It now remains to be seen whether events next week, like GDP and the Bank of Japan policy meeting, will be able to point JGBs in the next direction," said Takafumi Yamawaki, a senior fixed-income strategist at BNP Paribas.
March 10-year futures rose 0.06 point to 139.36 after dipping to an intraday low of 139.18. The contract jumped nearly a full point on Thursday.
The 20-year yield climbed 1 basis point to 1.865 percent. The benchmark 10-year yield was unchanged at 1.255 percent after hitting 1.270 percent. The yield brushed a two-week low of 1.250 percent on Thursday.
The five-year yield dipped half a basis point to 0.710 percent. The BOJ's policy board begins a two-day meeting on Wednesday. "The focus will be on whether the BOJ discusses increasing purchases of short-term bills," said Yamawaki at BNP Paribas. BOJ policy board member Atsushi Mizuno suggested earlier in the month that the central bank, which already guides overnight rates near zero, should study ways to lower term interest rates.
Term rates roughly encompass lending rates from one week to a year. Although the BOJ cut its target for overnight interest rates close to zero in December, term rates remained elevated on credit and liquidity concerns. Analysts say one way of manoeuvring certain term rates lower is for the central bank to increase the amount of short-term bills it purchases. The two-year yield fell 1 basis point to 0.385 percent on Friday, as expectations of the BOJ implementing steps to cap term rates lifted euroyen futures and nudged Tibor lower, traders said.
The Nikkei snapped a three-day losing streak on hopes for a US government programme to subsidise mortgage payments for troubled homeowners. It had shed more than 3 percent on Thursday.
Any negative reaction by stocks to potentially downbeat GDP numbers on Monday is expected to spur flight-to-safety moves into debt, but market watchers suggested an excessive decline by equities could also hurt JGBs.
"If the stock market probes the downside, that could lower risk tolerance and force financial institutions to take profits in bonds ahead of the March fiscal year-end," Tetsuya Miura, chief fixed-income strategist at Shinko Securities, said in a note.