JGBs yields drop to more than 2-year lows after dovish Fed surprise

Japanese government Bond (JGB) yields plunged to their lowest since November 2016 on Friday after the Federal Reserve abruptly abandoned a tightening policy bias, sending U.S. Bond yields sharply lower.

Ten-year JGB futures gained 0.23 point to 152.96 yen (about 1.38 U.S. dollars) in afternoon trade, with a trading volume of 18,720 lots. The market was closed on Thursday for a national holiday.

Bond prices rallied across developed markets after the Fed on Wednesday brought its three-year drive to tighten monetary policy to an end, with European yields also sharply lower, signaling the growing belief that all major central banks are now looking to keep financial conditions easy.

The rise in futures helped push yields on some JGB maturities deeper into negative territory, with the benchmark 10-year yield shedding 2.5 basis points to minus 0.065 percent, its lowest since November 9, 2016.

Japanese Yen banknotes and coins / VCG Photo

Japanese life insurers may shift a part of their domestic Bond allocations to foreign non-emerging market Bonds from the start of next fiscal year (starting April 1), said Takafumi Yamawaki, head of currency and fixed income research at J.P. Morgan Securities in Tokyo.

Some life insurers may be attracted to scooping up eurozone Bonds because funding costs for the euro are relatively low, even as 10-year German Bond yields remain close to zero, he added.

Yields on super-long maturities fell the most on Friday, with the 20-year yield down 3.0 basis points at 0.360 percent and the 30-year yield of 3.5 basis points at 0.530 percent. The 40-year yield shed 4.0 basis points to 0.590 percent.

The yields on all those maturities hit their lowest since November 2016.

On the short-end range of the yield curve, yields also fell, with the two-year and the five-year yield down, respectively, 1.0 basis point and 1.5 basis points, at minus 0.175 percent and minus 0.185 percent.

Data on Friday showed Japan's core consumer prices rose 0.7 percent in February from a year earlier, slowing from the previous month's pace.

Also on Friday, a liquidity-enhancing auction, at which the finance ministry sold 400 billion yen of JGBs, attracted relatively weak demand.

The bid-to-cover ratio, a gauge of demand, slipped from 5.54 at the previous auction to 4.41.

The finance ministry regularly sells off-the-run JGBs at these auctions to improve market liquidity.