TOKYO: Japanese government bonds trimmed losses on Friday, with the benchmark yield falling to a fresh three-week low, supported by persistent worries over the European debt crisis.
But the yield curve steepened as players were hesitant to chase prices higher, especially in superlongs, as they are watching developments on a proposed consumption tax hike.
The ruling Democratic Party plans to agree by the end of the year a proposal to double the 5 percent sales tax to pay for rising welfare costs, while Prime Minister Yoshihiko Noda is struggling to win broad support among lawmakers and the public for sales tax hikes even as Europe's debt woes have underscored the perils of heavy national debt burdens.
March 10-year JGB futures opened lower on Friday as upbeat US economic data and a solid Spanish debt auction reduce fears that the euro zone debt crisis could spark a global recession, lifting stocks and denting appetite for safe-haven JGBs, but they erased losses and ended midday at 142.40, 0.01 point higher.
"We can't really say yesterday's market moves in Europe and the United States will become a trend yet, so selling pressure on JGBs is limited," said Shinji Nomura, chief fixed-income strategist at SMBC Nikko Securities.
The 10-year benchmark cash bond yield fell 0.5 basis point to 0.970 percent, hitting its lowest level since November 24.
Superlongs such as 20- and 30-year bonds underperformed other maturities, with the spread between five- and 30-year debt widening to 158.5 basis points, off a one-month low of 157 basis points marked this week.
But buying on dips remained intact, market players said, with some Japanese investors looking to reinvest funds. The 20-year yield was flat at 1.750 percent on Friday after rising as high as 1.760 percent, and the 30-year yield inched up 0.5 basis point to 1.925 percent after climbing to 1.930 percent at one point.
Thursday's 1.1 trillion yen 20-year JGB auction drew tepid demand, with the tail expanding to its widest in two years.
"Although the tail widened, investor demand looked to be intact afterwards. The results were weak because brokers couldn't take risks before year-end," said a fixed-income strategist at a US brokerage.
The tail is the difference between the average and the lowest price at an auction. A wider tail suggests there is less consensus about where new bonds should be priced and is regarded as a sign of weak demand.
US data showed weekly applications for unemployment insurance fell to a 3-1/2 year low, while a gauge of New York state manufacturing activity rose to its highest level since May and another measure of factory activity in the mid-Atlantic region showed a surge in new orders.
Japan's Nikkei share average gained 0.4 percent on Friday.
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