Japanese bond futures inch lower

Japanese government bond futures inched lower on Friday as signs of strength in the US economy temporarily broke through gloom over the European debt crisis, but persisting worries about the region kept the benchmark yield at a three-week low.
The spread between the medium and longer end of maturities widened as players were hesitant to chase prices higher, especially in superlongs, with the focus on a proposed rise in Japan's sales tax. The ruling Democratic Party plans to agree by the end of the year a proposal to eventually 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 closed at 142.31, down 0.08 point, 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 investors' appetite for safe-haven JGBs, but they mostly stayed near a three-week high of 142.46 hit this week.
"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. Trading in futures was subdued as their volume declined to around 17,600 lots from over 28,000 lots on Thursday as many foreign players will begin year-end holidays from next week, a trader at a Japanese bank said.
The 10-year benchmark cash bond yield was up 0.5 basis point at 0.980 percent, after hitting 0.970 percent, its lowest level since November 24. Market participants were cautious about chasing JGB yields lower as they are already very low and have limited room to fall, and are mindful that a drop in the 10-year yield below 0.82 percent last year was quickly reversed.
The 30-year bonds underperformed as their yield rose 1 basis point to 1.930 percent at one point, and the spread between five- and 30-year debt widened to 158.5 basis points, off a one-month low of 157 basis points marked this week. But buying on dips remained intact, although Thursday's 1.1 trillion yen ($14.11 billion) 20-year JGB auction drew only tepid demand, market players said, with some Japanese investors looking to reinvest funds ahead of a large bond redemption this month. The 20-year yield was flat at 1.750 percent on Friday after rising as high as 1.760 percent.
"Although the tail (at yesterday's 20-year auction) widened, investor demand looked to be intact afterwards. The results were weak because brokers couldn't take risks before the 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.