JGBs extend gains as hopes fade for debt crisis solution

TOKYO: Japanese government bond prices extended gains and the benchmark yield declined to a two-week low on Friday as the European Central Bank dashed hopes of a broad bond purchase programme, triggering a slump in riskier assets and lifting investor appetite for safe-haven government debt.

European Union leaders looked set to adopt a new system of fiscal discipline later on Friday, but sentiment on risk assets worsened after the European Central Bank dampened hopes that it would serve as lender of last resort and as Germany rejected a long-term goal of issuing common euro zone bonds.

The 10-year JGB yield declined 2 basis points to 1.015 percent, its lowest since November 25, and moving away from a four-month peak of 1.090 percent hit last week. The five-year yield was down 1.5 basis points at 0.340 percent.

Japan's Nikkei average dropped 1.5 percent, along with its regional peers.

While a failed German bond auction late last month had sparked fears that investors could start dumping Japanese bonds given Japan's indebtness, such worries seem to have eased after recent successful bond auctions in the country.

"I expect markets to struggle to digest headlines from the EU summit, because anything that comes out would probably fall short of expectations anyway," said Katsutoshi Inadome, fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.

On Friday, cash bonds in various maturities were supported by investor demand, said a trader at a US brokerage, on the view that yields may not go up after the EU summit.

But their buying is expected to slow as the 10-year yield falls near 1 percent, analysts said, with many investors not wanting to repeat their experience last November when a drop in the 10-year yield to a seven-year low of 0.82 percent was followed by four months of a painful bear market.

December 10-year futures gained 0.26 point to 142.58. March futures, which will become the benchmark contract by Monday at the latest as trading in the December contract will end on Friday, rose 0.24 point to 141.98. Volume for March futures climbs to over 18,000 contracts this morning, surpassing those of December.