Japanese bonds gain

Japanese government bonds rose on Friday as a move earlier this week by the world's major central banks to ease funding strains among banks continued to ease volatility, pushing down the benchmark yield from a four-month high. Market participants said Thursday's 2.2 trillion yen ($28 billion) auction of 10-year JGBs was well digested given recent financial market turmoil, prompting short-covering in JGB futures and the yield curve to bull-flatten.
The five-year yield declined 1.5 basis points to 0.355 percent. The benchmark 10-year yield fell 2 basis points to 1.065 percent, off a four-month high of 1.090 percent marked on Thursday. "The fundamental problems in the eurozone are not easy to resolve and we need to see the outcome of the European summit next week, but investors' demand for JGBs, which had been dented by a recent increase in volatility, is gradually recovering after the liquidity move by central banks," said Takeo Okuhara, fund manager at Daiwa SB Investments.
Amid mounting tensions in financial markets, JGB futures' trading band had widened, bringing up implied volatilities for 90-day call options on the 10-year JGB futures to their highest since August earlier this week. Superlongs such as 20- and 30-year bonds recouped losses from the morning as futures gained momentum, helped the yield curve to flatten. The spread between 10- and 30-year yields shrank to 90.5 basis points on Friday, its tightest in nearly two months, from an eight-month high of 99 basis points hit last month.
JGBs gained despite a rise in the Nikkei stock average, on expectations that the gloomy economic outlook in Europe and emerging markets will keep weighing on share prices and support demand for government debt, traders and fund managers said. Lead 10-year JGB futures were up 0.20 point at 142.08, off a four-month low of 141.52 marked on Thursday and marking the highest in a week.