* 10-yr futures end at highest level since July
* 10-, 2--yr yield spread could further narrow- strategist
By Lisa Twaronite
TOKYO, Nov 9 Japanese government bonds rose on
Friday, pushing down benchmark yields to one basis point shy o f
a 9-year low, as fears about a looming U.S. fiscal deadlock
underpinned fixed-income assets.
The U.S. economy faces a so-called "fiscal cliff" of about
$600 billion in expiring tax cuts and spending reductions due to
take effect in January, unless newly re-elected President Obama
can reach a deal with Congress to curb the deficit.
"Japanese investors are certainly interested in how the U.S.
comes to terms with this and are following it," said Tomohiro
Miyasaka, an analyst at Credit Suisse in Tokyo.
The U.S. government must also reach an agreement to raise
its debt ceiling to avoid a government shutdown. The outcome of
these issues could have implications for the Treasuries market,
and by extension on JGBs.
Concerns about the euro zone also bolstered demand for
bonds, after European Central Bank president Mario Draghi
sounded downbeat on the euro zone economy on Thursday. The ECB
held rates steady as expected.
The 10-year yield slipped 1 basis point to
0.730 percent, its lowest level since Aug. 3 and not far above
its nine-year low of 0.720 percent touched several times in
July. That level has been its lowest since June 2003.
Some strategists and market participants believe the July
low is the market's next target on the way to further declines,
while others think rates might be close to a bottom at their
"There's only a small chance that benchmark JGB rates will
move as low as 0.70 percent, but whether they can rise from here
depends to a large extent on the direction of U.S. Treasuries,"
said Ayako Sera, a market economist at Sumitomo Trust and
Ten-year JGB futures ended up 0.06 point at 144.56
after rising as high as 144.61, their highest level since July
The superlong sector continued to rise in the wake of solid
demand at Thursday's 40-year auction, with yields on 30-year
bonds losing 1.5 basis points to 1.900 percent,
their lowest since Oct. 3.
Yields on 20-year debt fell 1 basis point to
1.650 percent after earlier touching 1.640 percent, their lowest
since Sept. 27.
The spread between 10-year and 20-year yields shrank to 0.92
percentage point from 0.93 point on Oct. 30 on a last-traded
basis, and some strategists say it could contract further as the
yield curve flattens.
The 10/20 spread can return to 0.85 point, so the current
level is attractive for establishing a flattener position,
strategists at Barclays advised clients in a research note on
The yield curve steepened at the end of last month as longer
maturities underperformed due to concerns about possible
issuance disruption if a deficit-financing bill needed to fund
this fiscal year's budget failed to pass this month. But those
concerns dissipated as the government and opposition parties
appeared closer to an agreement on its passage.