Japanese government bond prices slipped on Friday on profit-taking and as weakness in German bonds spooked some investors, pushing the benchmark yield to its highest in over three weeks. German bonds dropped after a failed auction on Wednesday, making some JGB investors worried that the sovereign debt crisis could spread to Japan as the country has by far the largest public debt compared to economic size in the industrialised world.
Cash 10-year bond yields rose to 1.030 percent, their highest since October 31, and up 5 basis points on the day. "When bonds of core countries like Germany are being sold, investors become very nervous. Some of them may feel like taking profits when they are still in the money," said Tadashi Matsukawa, head of fixed income investments at PineBridge Investments.
Japanese regional banks are said to be taking profits in JGBs after their investment in bonds issued by Norwegian export credit finance company Eksportfinans turned sour as Moody's abruptly downgraded the company by seven notches to junk status earlier in the week. According to SMBC Nikko Securities, Eksportfinans has about $12.5 billion of debts in yen, which is about 36 percent of its total debt. Considering Japanese investors have also bought uridashis in other currencies, their exposure should top 1 trillion yen, it said.
Ten-year JGB futures dropped 0.51 point to 142.29, having fallen to as low as 142.13, their lowest in over three weeks. They posted their biggest daily losses since mid-March. Volume surged to the largest this year at over 49,000 lots. Short-term players such as hedge funds and commodity trading advisers (CTA) were cited as aggressive sellers of JGB futures, prompting them to break below some major technical support points, including their 20-day moving average around 142.70 and a very thin Ichimoku cloud between 142.49-142.50. The yield curve bear-steepened, as investors such as Japanese banks were said to be shortening the duration of their portfolios, undermining bonds with longer maturities.
As the European debt crisis makes the global economic outlook increasingly uncertain, investors are likely to be highly risk-averse, preferring to stick to short-term notes, rather than more volatile long-dated bonds, said Mari Iwashita, chief market economist at SMBC Nikko Securities. Twenty- and 30-year yields both rose more than 5 basis points. The 20-year yield hit a 2-1/2 month high at 1.795 percent. The spread between five and 20-year yields climbed to 144 basis points, the largest since early-September.
Although investors held off buying amid sharp falls in JGBs, bargain hunters will likely emerge at some levels as there are not many alternatives to take in expectation that the eurozone debt crisis will rumble on. France and Germany agreed on Thursday to stop bickering openly about whether the European Central Bank should do more to rescue the eurozone from a deepening sovereign debt crisis. French President Nicolas Sarkozy also said Paris and Berlin would circulate joint proposals before a December 9 European Union summit for treaty amendments to entrench tougher budget discipline in the 17-nation euro area.