The Japanese government bond yield curve flattened on Friday, with superlong yields dipping as selling pressure from a week-long sell-off driven by issuance concerns eased slightly. A wait-and-see mood prevailed as the market awaited details of a meeting between Japan's Ministry of Finance and JGB primary dealers later in the day, watching for any mention of a potential supply increase for this fiscal year and how it may be allocated along various maturities.
The yield curve flattened, with the five-year/20-year yield spread pulling back from a four-year high, as superlong JGBs were bought back due to an easing of paying pressure in the yen interest rate swaps market. "The shape of the yield curve changed mostly on curve trades, but the market appeared neutral in overall terms," said Takafumi Yamawaki, a senior interest rates strategist at BNP Paribas Securities.
Through curve trades market players take opposite positions in different maturities hoping to profit from either a steepening or a flattening of a bond yield curve. The JGB curve had steepened until Thursday, partly because superlong 20- and 30-year yields were tugged higher by strong paying in swaps, which in turn was led by funds speculating on the curve steepening in the wake of an expected increase in bond issuance.
But the paying pressure in swaps subsided on Friday as the market underwent a correctional phase, allowing bargain hunters to pick up cash superlong bonds. The five-year/20-year yield spread tightened to 146.5 basis points from 150 basis points on Thursday, which was the widest since August 2005. December 10-year futures fell 0.07 point to 138.31 after pulling back from a two-month low of 138.14.