Japanese government bonds gained on Friday, bouncing back from earlier losses as investors underpinned shorter-dated maturities with buying ahead of the end of the quarter. JGBs dipped early in the day after a tumble in US Treasuries the previous day and a bounce in Tokyo's Nikkei stock average.
But bonds clawed back thanks to bids for shorter-dated paper, which investors such as banks bought before June 30 to make up for a slow start to the quarter.
The redemption of 10 trillion yen (103 billion dollar) of JGBs this month has added to investor demand, while a planned rise in debt issuance from next week capped prices on the upside. Japan will issue approximately 17 trillion yen of extra JGBs for fiscal 2009/10 to help pay for fiscal stimulus packages.
Analysts said shorter-dated JGBs were slightly better supported ahead of the rise in issuance as they are expected to benefit more from the Bank of Japan's easy monetary policy, under which it has pinned interest rates at 0.10 percent.
The market will face its first issuance increase at a two-year auction on Thursday, with the Ministry of Finance due to raise the amount it offers to 2.4 trillion yen from 2 trillion yen. "The auction should go smoothly despite the increase as these maturities stand to benefit from the BOJ's easy policy," said Koji Ochiai, a senior market economist at Mizuho Investors Securities.
"Although a major disruption is not expected as the market has already priced in the total issuance increase, prospects for longer dated JGB auctions next month are a little more uncertain." September 10-year futures rose 0.17 point to 136.92.
The two-year yield fell 1.5 basis points to 0.350 percent, and the five-year yield dropped 2.5 basis points to 0.780 percent. The 10-year yield fell 0.5 basis point to 1.445 percent after hitting 1.470 percent.
The 10-year yield struck an eight-month peak of 1.560 percent last week, pressured by a jump in Treasury yields and a stock market rally that pushed Tokyo's Nikkei average to an eight-month closing high above 10,000.
The 20-year yield edged up 0.5 basis point to 2.100 percent. In the money market, three-month September Euroyen futures were up 0.005 at 99.500 after falling to 99.485, lowest for the contract since it took over the lead role in mid-May.
Market players said Euroyen futures were partially pressured after the British Bankers' Association said on Thursday it would change its definition of the London Interbank offered rate (Libor) to allow a greater number of institutions to participate in the daily rate fixing process. The proposed change to the BBA rate survey spurred fears the British group would permit less creditworthy banks into the Libor process, raising the funding cost structure and adding upward pressure on Libor, analysts said.
Dollar Libor rates impact yen Tokyo Interbank offered rate (Tibor) rates, which in turn influence euroyen futures. "As in the past, swings in the short-end, such as euroyen, should be seen with care by the rest of the interest rate market, more so since the sector has underpinned other yields," Credit Suisse interest-rate strategist Kenro Kawano wrote in a note.
Treasuries tumbled on Thursday after the US Treasury announced another record round of auctions for next week and more data provided evidence that the US recession was easing.
The Nikkei gained 0.9 percent after a rise on Wall Street, though the Japanese benchmark share average logged its worst weekly performance in three months.