Japanese government bond futures inched up on Friday, taking their cue from a rise in US bonds, but gave up some gains with participants wary of chasing prices higher in case profit-taking emerges ahead of half-year book closings. The market took in stride President Barack Obama's proposal for a $447 billion jobs package to boost the US economy, but was overshadowed by a possible rise in JGB issuance due to a third extra budget.
The 10-year yield was pinned near 1 percent on views a decisive fall below that level is unlikely. "Reconstruction bonds are likely to be issued in medium- to longer-dated maturities based on discussions so far, but it really depends on when the tax hikes will be superlongs could be weighed down if tax hikes are limited. So people are sensitive about sectors on which they should be bullish or bearish," a trader at US brokerage said.
Japan's government is now compiling the third extra budget, mainly to cover reconstruction from the March earthquake and tsunami, and aims to submit it to parliament in October. JGB players were also seen hesitant to chase yields lower as profit-taking could emerge as investors cover losses from the recent stock market sell-off ahead of their half-year book-closings on September 30.
The 10-year yield fell 1 basis point to 1.000 percent, having touched 0.995 percent, its first break below 1 percent in two days, while the yield of five-year bonds was flat at 0.355 percent. The yield curve bull-flattened as the longer end performed better than other maturities. The spread of five- and 10-year yields shrank to 64.5 basis points, the tightest since mid-November.
The 20-year yield declined to a three-week low of 1.760 percent, 2 basis points lower than the previous day, seen supported by real demand from investors such as big Japanese banks and pension funds. Charts remain bullish as December 10-year JGB futures inched up 0.03 point to 142.51, staying within striking distance of a 10-month high of 143.07 hit this week.
Chances of economic slowdowns in the US and Europe, signs of a slowdown in Japan's economy after a sharp rebound from reconstruction following the March disaster, and hopes for additional monetary easing by the US central bank underpinned investors' demand for safe-haven debt.
Japan's economy shrank in the second quarter at a faster pace than initially reported as companies held back on capital spending due to worries about a rising yen and faltering global growth. But some think buying below 1 percent on the 10-year JGB yield could be short-lived, recalling the yield's rise last year despite monetary easing in United States and Japan.
Shinji Nomura, chief fixed-income strategist at SMBC Nikko Securities, said there will be a little room for the 10-year JGB yield to fall further below 1 percent, as the next easing by the Federal Reserve would be limited to a manoeuvre dubbed Operation Twist, in which it would sell short-term Treasuries from its balance sheet and buy long bonds to help lower long-term interest rates, instead of another round of quantitative easing. US Treasuries rallied on Thursday as vague encouragement by Fed Chairman Ben Bernanke and dismal data on the job market prompted talk of another Fed bond buying programme.