Japanese government bonds rose broadly today on a weaker US economic outlook and after sources said the Bank of Japan is expected to ease monetary policy this week if the yen continues to rise quickly enough to trigger currency intervention, pushing the benchmark 10-year yield to an 8.5 month low.
A 2.2 trillion yen (€19.9 billion) 10-year JGB auction drew firm demand despite of a lower coupon, underscoring investors' appetite for debts at lower yields.
"Investors who haven't been able to buy enough JGBs are now being forced to buy because the US economic outlook has weakened and expectations for BOJ monetary easing are increasing," said a fund manager at a Japanese asset management firm.
"Economic fundamentals are usually big factors in moving yields, and that is the case this time as well," he added.
US Treasury debt prices rallied yesterday as a troubled outlook for the US and global economies whetted investors' appetite for safe-haven government debt, sending yields to their lowest in more than eight months.
A closely watched measure of US manufacturing underscored the precariousness of the US economic outlook after gross domestic product figures last week showed minimal growth in the first half of the year.
Long-dated cash bonds, mainly 10-year maturities, were likely helped by demand from investors such as Japanese banks, and buying spread to other short-dated, superlong maturities and futures.
The Bank of Japan is expected to ease monetary policy this week to support a fragile economic recovery if the yen continues to climb fast enough to prompt currency intervention, sources familiar with the central bank's thinking said.
The yield of the No 315 10-year bond dipped 3.5 basis points to 1.040 per cent. The yield of the five-year bond also fell 1.5 basis points to 0.355 per cent. Both yields marked their lowest points since mid-November.
The yield curve was bull-flattened with the spread of five- and 10-year yields tightening to 68.5 basis points, the tightest since late-December.
As the 10-year yield broke below the lower end of a well worn range from 1.06-1.11 per cent, more investors were seen being forced to lower their yield outlook.
A fall below 1 per cent could open the way for a test of last October's low of 0.82 per cent, though few market players see that happening.
"It's not unusual for the 10-year yield to break below 1 per cent for very brief periods, but it is unlikely to continue to decline too far below 1 per cent as the US economy is not yet facing the kind of deflationary pressures it saw last year," said Keiko Onogi, a senior JGB strategist at Daiwa Securities Capital Markets.
Superlongs - such as 20- and 30-years - also performed well. The 20-year yield hit a fresh nine-month lows of 1.815 per cent, and the 30-year yield found a similar low at 1.965 per cent.
September JGB futures were up 0.24 point at 142.02, having hitting a fresh 8.5 month high of 142.08 today.
An auction of 10-year Japanese government bonds today attracted bids 3.07 times the amount accepted, indicating firm demand.
Reuters
