TOKYO: Long-dated Japanese government bonds jumped on Tuesday as shares extended the previous day's steep losses with investors fleeing risk assets on growing doubts over Greece's ability to avoid default, sending the 10-year yield below the key 1 percent level.
Fears over the banking sector's exposure to euro zone sovereign debt and the plummeting value of risk assets across the board led to a further sharp widening of credit default swaps, increasing the allure of government bonds.
"The possibility of the 10-year yield staying near or below 1 percent is increasing because the situation in the credit market is obviously worse than last year, when the yield hit 0.8 percent," said a fund manager at a US asset management firm.
"The market is looking more like 2008, when credit risk increased significantly."
The cost of insuring against Japan's default in the credit derivative market rose to a record high on Tuesday. The iTraxx Japan CDS index of leading companies hit its highest since July 2009.
December 10-year JGB futures closed up 0.27 point at 142.54, having hit their highest in a week at 142.62, and charts were regaining the bullish momentum that had been weakening in the past few days. Their volume rose to over 27,000 lots, far above last month's average daily volume of around 19,500 lots.
The Nikkei share average fell to a 6-1/2 month low at one point on Tuesday and closed down over 1 percent, though off its lows.
The benchmark 10-year yield declined 3.5 basis points to 0.990 percent, approaching a 10-month low of 0.965 percent.
It performed better than other maturities, underscored by a 2.2 trillion yen ($28.7 billion) 10-year sale, which drew moderate demand despite a lower coupon. .
Traders said not only Japanese banks but life insurers, which are main players for superlongs such as 20- and 30-year JGBs, poured cash into the new bonds as the second half of fiscal year has just started.
The five-year yield fell 1.5 basis points to 0.345 percent, while the 20-year yield fell 2 basis points to 1.705 percent.
Many investors in the JGB market have been cautious about buying at 10-year yields below 1 percent as historically falls below that level have not been sustainable and are always followed by selloffs, such as in November last year.
But reasons to hold off from buying are getting fewer. Concerns about additional debt sales to finance an already drafted extra budget have somewhat receded, as many now expect it to be smaller than initially thought.
Many players see room for yields on long-dated JGBs to fall as the performance of JGBs has been poor compared with US Treasuries, which have just marked a robust third quarter. Prices of long-term US debt have shown their best performance since the last three months of 2008. The same maturities in JGBs gained for the second straight quarter in July-September, but advances were subdued compared with the previous quarter.
"It really depends on how much duration risks Japanese investors can take in the (October-March) second half of the current fiscal year based on risks calculated from their equity holdings," said Yusuke Ikawa, a rates strategist at RBS Securities.
The market's overwhelming focus on Greece's financial woes overshadowed a better-than-expected reading from the US Institute of Supply Management's September manufacturing index and a rise in construction spending, potential evidence that the US economy can avoid a recession.
European policy-makers met on Monday to discuss ways to leverage the euro zone's rescue fund and pressure Greece to implement agreed structural reforms.
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