Japanese government bonds rose on Friday on confirmation that there would be no increase in debt sales to the market to fund an initial emergency budget for disaster relief and on investor appetite ahead of a string of public holidays, pushing the 10-year yield to a four-week low.
Japan's government approved 4 trillion yen ($48.8 billion) in spending on Friday in its first disaster relief budget, six weeks after a devastating earthquake and tsunami, and kept to its promise of no additional borrowing to fund it. June 10-year JGB futures were up 0.17 point at 139.75 after hitting a three-week high of 139.82, breaking above the 100-day moving average that is now around 139.61. The RSI reached an overbought level above 80 percent.
The 10-year bond yield fell 1.5 basis points to 1.210 percent, its lowest since March 25. The five-year yield marked a three-week low of 0.485 percent, down 1.0 basis point. "It is positive that the JGB market has been able to confirm that there will be no increase in debt issuance with the first emergency budget," said Katsutoshi Inadome, fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.
JGBs were buoyed by demand from investors who may feel compelled to increase their positions at the start of the financial year, as there are no major auctions of long-term maturities until a 10-year offering on May 12, after the Golden Week holidays in late April and early May.
Upcoming economic indicators are expected to be weak and should support JGBs, analysts said. In a series of interviews with Reuters, Japan's top life insurers have said they planned to increase allocations to JGBs this year and are looking to maintain or increase the duration of their bond portfolios.
Nippon Life, the country's largest life insurer with 49 trillion yen ($598 billion) of assets, said it planned to increase its yen bond holdings by around 700 billion to 800 billion yen in 2011/12, after increasing them by 1.16 trillion yen in the previous fiscal year.
It expects the 10-year yield to stay capped initially as the Japanese economy is likely to be hobbled by damage from the earthquake and resulting power supply problems. But the yield could gradually rise later in the year with a recovery in the economy and on worries about Japan's deteriorating fiscal health, as it faces the staggering costs of reconstruction after the disaster, the insurer said.
The yield on the 20-year JGB fell 1.5 basis points to 2.005 percent. The 30-year yield hit a three-month low of 2.110 percent, down 2.0 basis points. The spread between five-year and 30-year yields shrank to 162.5 basis points, taking the yield curve to its flattest in six weeks. But players were seen maintaining a cautious stance and not chasing prices higher because increased debt issuance will be needed in the future to finance reconstruction.
Debate on subsequent extra budgets and a possible tax hike is expected after Golden Week, with investors maintaining a close watch on Japan's fiscal health. "I think it is hard to raise taxes in a situation like this because it kills consumption and economic growth, and we may not be able to see the benefits from reconstruction if taxes are raised," said a fund manager at a Japanese asset management firm.
JGBs also received a lift from gains in US Treasury prices, which rose on Thursday ahead of a key Federal Reserve meeting next week where investors expect Chairman Ben Bernanke to offer a more dovish tone on US interest rates than some other Fed members have given in recent weeks.