TOKYO: Japanese government bonds gained on Friday, supported by safe-haven bids as surging bond yields in euro zone nations raised fears the debt crisis there could spiral out of control, keeping the 10-year yield near a one-year low.
The yield curve bull-flattened as the decline in yields of superlong bonds such as the 20- and 30-year bonds outpaced other maturities, bucking the recent trend of steepening. Some said dip buying by investors such as pension funds was helping the yields to decline.
Superlongs had been under pressure ahead of next week's 20-year JGB auction. Market participants felt it would be better to stick to medium maturities or those up to 10 years even though superlongs look cheaper. They said the medium sector offers a more favourable supply outlook and is less prone to contagion risk from overseas.
But superlongs performed better on Friday as market participants think a recent decline in bond yields up to the 10-year issue has been overdone. The 20-year yield declined 1.5 basis points to 1.700 percent and the 30-year yield fell 2 basis points to 1.920 percent, while the benchmark 10-year yield was down 1 basis point at 0.940 percent.
"I think the recent one-sided move on the euro-zone crisis is easing because the 10-year yield is falling to a level where the market is factoring in accelerating deflation. People are bidding superlongs for now as other maturities are overbought," said a fund manager at a Japanese asset management firm.
Many market players expect a yield decline in superlongs along with medium-dated maturities, which are supported by the easy monetary policy stance of the Bank of Japan.
Lead 10-year JGB futures rose 0.14 point to 143.11, holding steady near a one-year high of 143.14 hit on Thursday.
Benchmark three-month euroyen interest rates futures , on the other hand, fell to an eight-month low of 99.645 on Friday on concerns that funding strains in the dollar money market may prompt banks to pay more to obtain yen funding.
Euroyen futures came under pressure as a fall in eurodollar rate futures sparked speculation that banks may rely more on yen funding as the dollar money market seizes up, although yen money market rates including the Tokyo interbank offered rate (TIBOR) have been mostly stable thanks to massive fund injections by the Bank of Japan.
In Europe, the premium of Spanish and French bonds over German Bunds hit euro-era highs after poor demand in debt sales, while Italian 10-year bond yields managed to drop to 6.9 percent but only after apparent bond-buying by the European Central Bank.
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