JGBs extend gains

Japanese government bond prices rose on Friday, extending their rally after the US Federal Reserve's vow to keep interest rates very low for about three years, with the 10-year yield edging closer to a 14-month low hit last week. The Fed's policy has spurred expectations that the Bank of Japan may also follow suit and keep rates near zero also for about three years.
That may set the stage for a slow long-term decline in JGB yields across the aboard despite investor caution that bond yields are already low by historical standards. "There's speculation the BOJ may have to do something following the Fed. On top of that, the correlation between US and Japanese bond yields has always been high," said Le Ngoc Nhan, a strategist at Morgan Stanley.
The 10-year cash bond yield fell 1.5 basis point to 0.965 percent, approaching the 14-month low of 0.935 percent hit Monday last week, and moving away from a high of 1.005 percent hit this week. Ten-year JGB futures rose 0.11 point to 142.61, building on their biggest gains in three months on Thursday.
The five-year bond yield fell 1.0 basis point to 0.330 percent, near last week's low of 0.325 percent while the 20-year yield fell 1.0 basis point to 1.730 percent, within sight of a January 16 low of 1.715 percent. Though few market players expect an immediate policy response from the BOJ to the Fed's move, many think a rise in the yen against the dollar and the euro could be a trigger for BOJ action, as has often been the case in the past.
With both the US Federal Reserve and the European Central Bank engaged in a policy to keep rates low for up to three years one way or another, some market participants suspect the yen could gain if the BOJ does not follow up with some sort of policy measure. Indeed, the yen gained 0.5 percent on Friday to 77.03 per dollar, edging closer to a record high of 75.31 per dollar and also near an 11-year high of 97.04 yen against the euro.
Regardless of whether BOJ makes an explicit commitment to keep rates near zero, if the Fed is to keep near zero rates until late 2014, the BOJ is likely to do so as well, given that the BOJ has been the last central bank to raise rates in the global tightening cycle, market players also said.
"If you ask 100 people whether they think the Fed or the BOJ would raise rates first, 99 would pick the Fed," said a trader at a Japanese bank. As such, the three-year JGB yield, which is around 0.20 percent, could fall closer to two-year yields, which are around 0.125 percent, said Makoto Noji, senior strategist at SMBC Nikko Securities.
Should that happen, the five-year yield could fall to around 0.25 percent, beyond last year's low of 0.290 percent, he added. Many market players also say the 10-year bond yield could fall to near 0.90 percent, even though investors are generally cautious about chasing the rally below one percent in the 10-year yield.