Japanese government futures edged down on Friday after hitting a three-week high the previous day, but losses were limited as stock market falls underpinned debt prices. JGBs were subdued and stayed in narrow ranges despite month-end buying by investors who follow certain bond indexes, analysts said.
Traders are keen to see the government's issuance plans for the fiscal year to next March, including how it plans to allocate the extra bond supply to fund a 15.4 trillion yen ($158 billion) stimulus package. The details are expected to come out next week when the government submits an extra budget to parliament.
The market has largely priced in about 17 trillion yen of bond issuance to fund the package including about 6 trillion yen worth of "zaito" agency bonds that are used to fund projects for government-related entities. June 10-year JGB futures edged down 0.11 point to 137.15 after touching 137.46 on Thursday, the highest since early April. The benchmark 10-year yield was steady at 1.425 percent.The 20-year yield slipped 1 basis point to 2.050 percent, and the 30-year yield was flat at 2.230 percent.
Short- and medium-term bonds were down as investors took profits on recent price gains with the 2-year yield up 1.5 basis points at 0.420 percent and the 5-year yield rising 1.5 basis points to 0.830 percent. The yield curve has steepened in the past month as longer-dated bonds were under pressure due to the expected rise in JGB issuance, while the short- and mid-term sectors were underpinned by the Bank of Japan's low interest rate policy.
After supply concerns eased, the spread between two- and 20-year bonds shrank to 163 basis points from a three-year high of 174.5 basis points reached on Monday. But it is possible the yield curve will steepen again as supply worries could strengthen, analysts said. Next week the market will also be looking to the US bond market as the Treasury will sell a total of $101 billion in two-, five- and seven-year notes, raising $82 billion in new cash. A rise in the yields of US Treasuries could lift Japan's bond yields.