Japanese government bond futures fell to a six-week low on Friday, stung by a fourth day of gains in Tokyo shares that spurred more selling of safe-haven debt. Traders said futures led the decline in the overall market, as more chart support levels were broken, casting a shadow over JGBs that could lead to more losses if stocks keep pushing higher.
Fading expectations for the Bank of Japan to cut interest rates also kept investors from buying short-dated bonds, even as life insurers and other institutional investors picked up 30-year bonds, nudging their yields lower.
Investors see only about a 10 percent chance of a BOJ quarter-point cut in rates later in the year from the current 0.5 percent, down from 50-60 percent earlier in the month, according to swap contracts on the overnight call rate.
Buying of five- and 10-year paper was also spotted during the session, making flows in the cash market mixed even as yields on most maturities rose, traders said.
JGBs have retreated as well on the renewed stability in stock markets. The Nikkei share average rose 0.6 percent to score its highest close in seven weeks. Yet traders also believe any rise in yields will be limited as the BOJ is seen keeping rates steady for a year or longer and as investors have only just started allocating funds to JGBs for the fiscal year that began this month.
"The BOJ may not cut rates, but that does not mean it is going to raise rates," said a chief manager of the bond trading section at a Japanese bank. "JGBs have seen enough of a slide to correct their surge in March." June 10-year futures dropped 0.29 point to 138.60 and hit a six-week low of 138.54.
The benchmark 10-year yield rose 2 basis points to 1.395 percent, a six-week peak. For the week, 10-year yields were up 2.5 basis points.
The five-year yield rose 1.5 basis points to 0.920 percent and struck a two-month high of 0.925 percent. Twenty-year yield rose 1.5 basis points to 2.155 percent as dealers sold the bonds to prepare for an auction of the maturity next week.
Shorter-dated notes and euroyen futures had been hit hard this week as market players believed that new BOJ Governor Masaaki Shirakawa was set to maintain the central bank's hawkish stance emphasising the need to normalise monetary policy.
That view helped slash expectations for a BOJ rate cut and pushed the two-year yield, which responds closely to expectations regarding central bank rates, as high as a three-month peak the previous session. The two-year yield rose half a basis point to 0.645 percent, up 4 basis points on the week and 16 basis points from the lows hit in March.
The new lead euroyen futures contract extended its losing streak this month to hit a four-month low, but market players said the decline should start to slow as foreign investors appear to have finished dumping long positions. December euroyen futures edged down 1.5 basis points to 99.185 and struck a four-month low at one point.
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