TOKYO: Japanese government bonds retreated on Friday, with investors squaring positions in the debt market especially in medium- and long-term maturities as a pullback in oil prices lifted shares.
Bond futures opened higher but erased those gains as the market watched whether tensions in the Middle East would continue to drive safe-haven demand for debt.
In cash bonds, superlong bonds with maturities exceeding 10 years performed better with support from bids by investors such as life insurers, market players said.
March 10-year futures fell 0.20 point to 139.59, reversing course after hitting a three-week high in the morning and snapping a three-day rally.
"The market was in no mood to bid on higher prices as shares rebounded," a trader at a foreign brokerage said.
The benchmark 10-year yield rose 2.0 basis points to 1.245 percent. The yield climbed to a 10-month peak of 1.350 percent earlier this month before the unrest in the Middle East escalated.
The five-year yield rose 2.5 basis points to 0.550 percent, with talk that investors were cautious about buying at levels below 0.55 percent.
The 20-year yield was up 0.5 basis point at 1.995 percent, after hitting 1.985 percent, its lowest in three weeks.
Twenty-year bonds were firm, supported by index-following players' month-end purchases, traders said.
The yield curve bear-flattened as the rise in mid-term yields outpaced long-term and superlong bonds, tightening the five-year/20-year spread to roughly 144 basis points from 148 basis points on Wednesday.
The five-year/10-year spread tightened to around 69 basis points, the lowest since late December.
"Offers were seen mainly in maturities such as the five-year or the seven-year, while superlongs were performing relatively well even after the curve bull-flattened quite a lot yesterday," said Shinji Ebihara, fixed-income strategist at Credit Suisse.
Analysts reckon the yield curve could continue to come under flattening pressure in the near term with the rise in oil prices on tensions in the Middle East keeping investors cautious towards risk assets and lifting appetite for government debt.
But some said the downward move in yields may slow as they approach levels, such as 1.2 percent in the benchmark yield, that would encourage investors to unwind flattening positions.
US Treasury debt prices rose on Thursday on safe-haven buying on the uprising in Libya and worries that oil price rises could crimp consumer spending, harming the US economic recovery.
Japan's Nikkei average rose on Friday for the first time in four days.
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