TOKYO: Japanese government bond futures rose to a 10-month high on Tuesday, supported by safe-haven demand on renewed fears the euro zone debt crisis is worsening and could trigger a second full-blown banking crisis.
The yield curve bull-flattened, bolstered by firm demand at Tuesday's 30-year JGB auction on the view that an economic slowdown overseas could weigh on Japan's post-quake recovery.
"The yield curve is expected to keep flattening," said Katsutoshi Inadome, fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities.
"Because of the slowdown overseas, the risk that Japan's economy will slow down is rising ... also, I feel fiscal issues are moving in the right direction and this can help the curve to flatten as well," he added.
September 10-year JGB futures were up 0.27 point at 143.06, after marking their highest level since early November at 143.07.
Trading volume for the lead JGB futures contract surged to more than 40,000 lots, the highest since mid-December, in a reflection of bullish momentum.
The 10-year yield fell to 0.985 percent, down 2.5 basis points and within striking distance of 0.970 percent, a 10-month low hit in mid-August.
Superlongs -- such as 20- and 30-years -- outperformed after a 700 billion yen ($9 billion) 30-year JGB auction drew firm demand from investors such as life insurers, market participants said. The tail, the difference between the lowest and average accepted prices, shrank to 0.08 from 0.13 at the pervious sale in July, the tightest since January tender.
The 20-year yield declined 3 basis points to 1.770 percent, and the yield of the No.34 30-year bond dipped 3.5 basis points to 1.940 percent, the lowest nearly in two weeks.
The yield curve bull-flattened as the yield spread of five- and 20-year JGBs narrowed to a one-month low of 146.5 basis points. That compared with 148.5 basis points the previous day, and a 3-1/2 month high of 152.5 basis points marked in late-August.
In contrast, gains in medium-dated bonds were capped by profit-taking from Japanese banks, which need to cover losses from sharp falls in share prices ahead of their half-year book-closing on Sept. 30, market participants said.
The yield on the five-year note fell 1 basis point to 0.305 percent, a two-week low, while the two-year yield edged down 0.5 basis point to 0.135 percent .
The Nikkei share average fell more than 2 percent on Tuesday after sovereign debt fears pummelled European stocks and as investors worry upcoming US job measures will not be enough to boost confidence in the slowing US economy.
The latest focus of Europe's crisis is Italy, whose bonds were sold off on Monday on worries that Rome is not doing enough to bring its debt under control.
Yields on Italian and Spanish government bonds hit their highest levels in nearly a month, while German Bunds yields marked record lows.
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