Long-end Japanese government bond prices slipped while shorter-dated bonds gained on Friday as investors bet on faltering growth in the near future and on a further deterioration in Japan's credit ratings down the road. Market players say some investors, possibly including a big Japanese bank, shifted their funds out of 20-year bonds to the five-year sector, helping to push the five-year yield to a nine-month low.
Although JGBs initially tracked gains in US Treasuries, investors were cautious about bidding prices up, especially on superlongs, such 20 and 30 years, as Japan's massive public debt could lead to more credit downgrades. Many investors are also aware that Japan's bond issuance looks set to increase later this year after an extra budget to finance reconstruction following the March 11 earthquake is compiled.
"You can't buy (long-dated bonds) with gusto when you have worries about a supplementary budget and credit downgrades," said a trader at a European brokerage. The 10-year yield dropped as far as 0.970 percent, its lowest in nine months, in a knee-jerk reaction to a sharp fall in the 10-year US bond yields. It fell below two percent for the first time since the 2008 financial crisis.
But 10-year Japanese government bonds gave up gains to finish with a yield of 0.980 percent, down one basis point on the day. Declines in JGB yields in recent weeks have been much smaller than those in US bond yields. US yields have fallen more than 70 basis points this month, while the Japanese yield has shed only 10 basis points.
Part of the reason behind the modest drop in JGB yields was that they were already very low and had limited room to fall. Investors were also cautious about pushing the 10-year yield further below one percent, remembering that its fall to 0.82 percent last year was quickly reversed. In another sign that investors are cautious about chasing further downside in yields, the 20-year yield edged up to 1.795 percent, up 0.5 basis point on the day, after earlier falling as low as 1.755 percent.
That widened the spread between the 10 and 20-year yield to 81.5 basis points, near a 3-1/2 month high of 82 touched earlier this week. In contrast, the five-year bond yield fell 2.0 basis points to 0.305 percent, having briefly fallen below 0.30 percent for the first time in nine months on fears of US recession and more trouble at US and European banks.