Japanese government bonds were mostly lower on Friday, with investors trimming long positions built up in this week's rally as they bet that Washington is likely to agree a deal to raise the US government debt ceiling and avoid default.
JGB futures handed back sharp gains made this week, with the decline possibly triggered by selling by short-term players, as their volume surged to the highest in two weeks. But they trimmed losses later in the day after Moody's placed Spain's credit rating under review for a downgrade, fuelling fears about the spread of the eurozone debt crisis and boosting already strong demand for safe-haven assets. "Investors are looking beyond the mess in US politics, with banks taking profits and adjusting their portfolios," said a fund manager at a Japanese asset management firm.
Medium- and long-dated cash bonds were weighed down by profit-taking and rotation trading by major and regional players, market players said. The market's immediate focus remains on a vote in the US House of Representatives on a Republican deficit cut plan but voting was postponed on Thursday as the party's leadership struggled to muster support for its plan.
The benchmark 10-year yield rose 0.5 basis points to 1.075 percent while the five-year yield climbed 0.5 basis point to 0.370 percent. Both yields remain within striking distance of eight-month lows of 1.060 percent and 0.360 percent hit last week.
Superlong and shorter maturities performed better, with the two-year yield inching down 0.5 basis point to 0.150 percent and the 20-year yield flat at 1.860 percent. JGBs rallied this week on safe-haven demand from overseas investors and cash-rich Japanese financial institutions as the deadlock in talks to raise the US debt ceiling and renewed fears of contagion in the eurozone bruised share prices. The 10-year yield fell near an eight-month low on Thursday.
Players expect JGB yields to stay near recent levels next week with potential upward pressure ahead of JGB auctions. The Ministry of Finance will offer 2.2 trillion yen ($28.2 billion) of 10-year bonds on Tuesday and 700 billion yen ($8.9 billion) of 30-year paper on Thursday.
September 10-year JGB futures were down 0.01 point at 141.83, after falling as low as 141.54. They climbed to 141.89 on Thursday, matching an eight-month high hit last week. The volume of the lead JGB futures contract surged to 27,541 lots on Friday, above this week's daily average of 14,300 and the highest since July 14.