TOKYO: Japanese government bonds were slightly higher on Friday in month-end bargain hunting, though gains were capped by investors' improved risk appetite after Spain's austerity plan raised hopes of progress toward solving Europe's debt crisis.
Spain's announcement of a detailed reform framework and a strict budget was seen by many as an effort to bring itself in line with the likely conditions for an international bailout, which would be a step toward implementing the European Central Bank's bond-buying programme.
Cash bond trading remained relatively thin on the final trading day of the Japanese half-year period. With trading comparatively subdued, many investors looked ahead to next week's 10-year bond auction on Thursday.
If present low yields continue, some market participants fear that the coupon will be below the current 0.8 percent at which it was set for the past three sales.
"That sector is a little bit expensive, but it's probably going to stay expensive. If you think the market is going to go sideways for a long time, then the high roll and carry around the 10-year sector is going to outperform," said Neale Vincent, strategist at Nomura Securities.
Yields on the current 10-year cash bonds fell half a basis point to 0.775 percent after earlier falling to 0.770 percent, retracing a seven-week low hit on Thursday.
Benchmark 10-year JGB futures ended morning trade up 0.02 at 144.12. Their intraday high of 144.16 fell short of Thursday's high of 144.25, which was their highest since Aug. 7.
Looking ahead, some market participants expect the government to cut its reference guaranteed yield for life insurers in early October. Nomura expects the yield to be cut to 1 percent from 1.5 percent.
Insurers use the reference rate to set their product rates, and 20-year bond yields tend to track it, trading within a range about 100 basis points above it.
The 20-year note was untraded at midday, after its yield closed at 1.640 percent on Thursday.
The 30-year yield rose 1 basis point to 1.895 percent, moving away from a three-week low of 1.870 percent hit on Thursday.
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