TOKYO: Japanese government bond prices gained on Thursday as worries Greece may exit from the euro zone brought in the risk-averse investors while expectations of strong demand at a 20-year JGB auction also lent support, flattening the yield curve considerably.
Superlongs such as 20- and 30-year bonds outperformed shorter maturities even ahead of a 1.2 trillion yen 20-year bond auction later in the day - a rare phenomenon that reflects expectations of strong demand at the tender.
The yield on the current 20-year yield fell 2.5 basis point to 1.630 percent. It hit a three-week high of 1.665 percent on Wednesday.
The new 136th 20-year bonds, the coupon of which the Finance Ministry set at 1.6 percent, matching a low set in August 2010, were traded at 1.645 percent in pre-auction trade.
Still, the 20-year bond, which had underperformed in recent sessions, is still relatively cheap on the yield curve and also in comparison with swap, market players said.
The spread between 10-year and 20-year yields stood at 78.5 basis points, near this year's high of 80.5 basis points. The spread with the swap rate is near its widest about four months.
"I think it is quite comfortable for dealers to bid at the auction given the relative cheapness of the 20-year sector now," said Akihiko Inoue, chief strategist at Mizuho Investors Securities.
"We'll have to see whether investors' demand will match (dealers' expectations), though," he added.
The 10-year yield fell 1.5 basis points to 0.845 percent , though market players say buying could slow near nine-year low of 0.815 percent hit last week.
Market players remained wary of the possibility of more turmoil in Europe's debt saga, with an informal summit of EU leaders shedding no new light on how they plan to keep Greece in the euro zone - or not.
European Union leaders said they were committed to Greece remaining in the euro zone, but that it had to stick to its side of the bargain too, a commitment that will mean a heavy cost for Greeks.
On the other hand, officials told Reuters each euro zone country agrees they will have to prepare a contingency plan for the eventuality of Greece leaving the single currency.