Japanese government bonds retreated on Friday, with the lead futures contract sliding from a five-month peak as investors sold on caution before a high-profile US monthly employment report later in the day.
Market participants were focusing on how the US Labour Department's jobs data at 1230 GMT would impact US stock and Treasury markets, after a JGB rally in the past month has pushed down yields across the curve.
Investors sold five-year notes to make room in their portfolio ahead of the Ministry of Finance's debt sale for the same maturity on September 8. Selling lifted the five-year yield from a four-year trough hit earlier this week.
"Some investors pocketed profits, thinking JGBs might be a little overbought," said Chotaro Morita, head of fixed-income research at Barclays Capital. But there were few aggressive sellers, traders said. JGBs have been supported by expectations that the Bank of Japan will keep interest rates at the current 0.1 percent level for some time as the economic recovery remains subdued. September 10-year JGB futures fell 0.26 point to 139.10, having fallen from a five-month high of 139.60 hit on Wednesday.
The 10-year yield rose 2 basis points to 1.320 percent. It hit a two-month low of 1.285 percent on Tuesday due to strong demand from domestic banks. Analysts and traders said the fall in bonds on Friday was no more than an adjustment after a bull-run in the past month.
Government data showed on Thursday Japanese companies cut spending on plant and equipment at a slower pace in April-June from a year earlier, suggesting the worst of the corporate spending freeze may be over. The data, which is used to calculate revised gross domestic product (GDP) figures due on September 11, came after a preliminary estimate showed Japan's economy expanded 0.9 percent in April-June, joining France and Germany in escaping the global economic slump and returning to growth first among G7 nations.
Separate data showed on Monday that Japan's industrial output increased in July for a fifth straight month as exports recover on the back of stimulus spending around the world. But even so, analysts said the outlook for the recovery remains foggy as companies are still saddled with excess capacity and stimulus measures in many economies will eventually expire.
"Investors are just unconvinced the recovery will gather pace," said Koji Ochiai, senior market economist at Mizuho Investors Securities. Investors are also comfortable about picking up JGBs, knowing that solid demand from domestic banks will support the market, Ochiai said. Japanese banks are cash-rich now due to the BOJ's easy monetary policy and slack demand for loans.
The five-year yield climbed 1.5 basis points to 0.605 percent, having risen from a four-year low of 0.580 percent struck this week. The 20-yr yield gained 1.5 basis points to 2.040 percent. The 30-year yield was unchanged on the day at 2.180 percent after hitting a fresh seven-week low of 2.175 percent. The yield spread between five- and 20-year notes was 143.5 basis points, off a four-year high of 148 basis points reached earlier this week. The incoming government in Japan should cut planned new issuance of JGBs in the year to next March by over 1 trillion yen (10.80 billion dollars) by revising an extra budget to fund stimulus spending, Hirohisa Fujii, a senior lawmaker in the new ruling Democratic party, said on Thursday in an interview with Reuters. The outgoing government planned a record 44 trillion yen in JGB issuance this fiscal year.