Japanese government bonds were lower on Friday, with superlongs underperforming the market on expectations that increased debt sales to finance post-quake rebuilding will push up JGB yields. The US credit downgrade has also raised fears that countries including Japan may be downgrade targets, market participants said.
"After the downgrade of US debt, which is seen as a safe-haven, the market is on the lookout for the next one ... one of them is France, because its banks' exposure to Greek debt is large, and the other is debt-ridden Japan," said a fixed-income fund manager at a Japanese bank. The yield curve bear-steepened as superlongs, such as 20 and 30 years, underperformed. The 20-year yield climbed 2.5 basis points to 1.850 percent, hitting a two-week high, while the 30-year yield rose 2.5 basis points to 1.990 percent. The spread between 10- and 20-year yields widened to a three-month high of 81 basis points. It marked 74 basis points earlier this month, the lowest since mid-February.
Prospects are growing that Prime Minister Naoto Kan will resign this month, and the market is eyeing the possibility of additional bond issuance to fund reconstruction after the March quake and tsunami, analysts said. The cost to insure buyers of Japan's sovereign debt against default held steady, with credit default swaps around 110 basis points. US credit default swaps have eased to just above 50 basis points, after rising as high as 63 basis points in the wake of the downgrade.
Market players also said a dismal 40-year JGB auction on Tuesday weighed on longer-dated JGBs such as the 30-years. "The 40-year zone had been one of the options for additional issuance, but after the sale on Tuesday, we just lost that option, and that has weighed on 30-year bonds," said Katsutoshi Inadome, fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.
The benchmark 10-year JGB yield was up 0.5 basis point at 1.040 percent, off a two-week high of 1.050 percent hit in early trade. It marked a nine-month low of 0.975 percent earlier this week, supported by safe-haven demand amid tumbling global equities following the downgrade to the US debt rating and amid Europe's ongoing debt problems. The two-year yield was down 0.5 basis point at 0.145 percent, while the five-year yield declined 1 basis point to 0.345 percent.
September 10-year JGB futures closed flat at 142.12. The lead contract earlier fell as low as 141.93, just above the 20-day moving average of 141.90. Market participants say this level has been supporting futures since mid-July. Earlier this week, the September contract hit a nine-month peak of 142.64.