Japanese government bond prices nudged up on Friday, with the 10-year yield a stone's throw from a one-year low hit in November, drawing support from strong demand at an auction in the maturity the day before. Firmness in JGBs, which came even as share prices rose, reflected a global trend since the turn of the year - relatively firm bond prices in spite of incremental gains in risk assets, which some analysts suspect is in part caused by massive fund injections from the European Central Bank.
"The ECB is effectively carrying quantitative easing, by providing unlimited amounts of funds to banks. As the ECB is taking care of bank funding, the risk of blowup has receded," said Mitsuru Saito, chief economist at Tokai Tokyo Securities, pointing to a sharp increase in the ECB's balance sheet. "But this Indian summer won't last long. Monetary policy alone cannot cure the crisis and there are many landmines out there," Saito added, citing tension between the West and Iran as well as lack of agreement on Greece's debt swap deal.
The 10-year cash JGB yield fell 0.5 basis point to 0.950 percent, near a one-year low of 0.940 percent marked last November. The Finance Ministry's sale of 2.2 trillion yen 10-year bonds on Thursday - Japan's first debt auction this year after the New Year holidays - drew solid demand from Japanese investors flush with cash.
"Yesterday's auction was decent even though the 10-year tenor was rather expensive on the yield curve. When you look at the results, it's hard to bet on a rise in yields," said a trader at a European brokerage. Although investor risk appetite appears to be returning globally after strong results at Spanish and Italian debt auctions on Thursday, market players expect Japanese investors - the main buyers of JGBs - to remain cautious about taking risk.
"Japanese life insurers that have sold Italian bonds have probably shifted some of that money to JGBs. I don't expect them to immediately move the money back to Italian bonds," said Chotaro Morita, chief bond strategist at Barclays. Capital flows data from Japan's Finance Ministry showed on Thursday that Japanese investors sold a record net 510 billion yen of Italian debt in November.
Many market players say domestic investors will have few alternatives but to park most of their funds in JGBs as foreign bonds are increasingly losing their appeal as their yields drop near record lows. "No one is seeking capital gains on JGBs. But as investors have to buy JGBs, I expect their yields to fall little by little," said a trader at a European brokerage.
The five-year yield was flat at 0.335 percent, and the 20-year yield declined 0.5 point to 1.735 percent. The yield on 30-year bonds was unchanged at 1.920 percent ahead of an auction in the tenor on Tuesday. Ten-year JGB futures rose 0.05 in price to 142.66. The market showed scant reaction to cabinet reshuffle by Japanese Prime Minister Yoshihiko Noda, who installed fiscal hawk Katsuya Okada as deputy prime minister as he braces for a political battle to push through his tax hike plans to curb Japan's debt already topping 200 percent of its economy.