TOKYO: Japanese government bond prices rose on Friday, with the 10-year yield edging closer to a 14-month low hit last week, extending their rally after the US Federal Reserve's vow to keep interest rates very low for about three years.
Expectations that the BOJ may also keep rates near zero for another three years could push JGB yields lower, even though current bond yields are already low by historical standards, market players said.
The 10-year cash bond yield fell 1.5 basis point to 0.965 percent, approaching the 14-month low of 0.935 percent hit Monday last week, and moving away from a high of 1.005 percent hit earlier this week.
The five-year bond yield fell 0.5 basis point to 0.335 percent, while the 20-year yield fell 1.0 basis point to 1.730 percent.
The 10-year JGB futures rose 0.04 point to 142.54, rising as high as 142.62 at one point, above a 61.8 percent retracement of their fall last week.
While the Fed's stance is unlikely to immediately affect the Bank of Japan's policy, market players are starting to speculate the BOJ may make a similar commitment in the future, if the yen strengthens against the dollar and the euro.
To be sure, the yen has not gained much since the Fed's latest policy meeting, leading many analysts to think that the Japanese central bank will refrain from taking new easing steps for now.
"The Bank of Japan takes action only passively. At the moment, Japanese share prices have held up so it is unlikely to do anything now," said Keiko Onogi, senior JGB strategist at Daiwa Securities.
But with the yen hovering not far from a record high of 75.31 yen against the dollar and an 11-year high of 97.04 yen against the euro, some market players think there's a chance the yen could test new highs and prompt the BOJ to take easing steps.
"You can't rule out the possibility that the BOJ will follow suit," said Makoto Noji, senior strategist at SMBC Nikko Securities.
And regardless of whether BOJ makes an explicit commitment to keep rates zero, if the Fed is to keep zero rates until late 2014, the BOJ is likely to do so as well, given that the BOJ has been the last central bank to raise rates in the global tightening cycle, market players also said.
Based on such an assumption, the three-year yield, which is around 0.20 percent, could fall closer to two-year yields, which are around 0.125 percent, said Noji.
Should that happen, the five-year yield could fall to around 0.25 percent, he added.
Copyright Reuters, 2012
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