TOKYO, March 6 (Reuters) - Japanese government bond prices soared on Friday, with the benchmark futures posting their biggest gain in more than four years on rising concerns that the coronavirus epidemic could lead to a drawn-out economic downturn.
Expectations of policy easing in Japan and the rest of the world fuelled aggressive purchases by short-term speculators in the futures, though buying in cash bonds was more subdued.
Benchmark 10-year JGB futures rose 0.73 points to 154.64, the biggest daily gain since Jan. 29, 2016, when the BOJ made a shock announcement to introduce negative interest rates.
After a surprise 50-basis-point rate cut by the Federal Reserve on Tuesday, U.S. money market futures have fully priced in another cut of the same magnitude at the Fed’s policy review on March 17-18, while some market players expect the BOJ to take rates deeper into negative territory in the same week.
Masahiko Loo, portfolio manager at Alliance Bernstein, however, said expectations of a BOJ rate cut could subside if the yen steps back from the current six-month high.
“At the moment, because of a widening epidemic, Japanese importers have stopped buying dollars. But when risk asset markets calm down, they could start buying dollars again. And that will reduce expectations of a BOJ rate cut,” he said.
In fact, buying was far less intense in the cash bond market, with many investors on the sidelines as they tried to assess the extent of economic damage from the coronavirus epidemic.
The 10-year JGB yield fell 2.5 basis points to minus 0.140%, while the 20-year JGB yield fell 2.5 basis points to 0.185%.
The 30-year JGB yield fell 3.5 basis points to 0.310%.
At the shorter end of the market, the two-year JGB yield fell 3.5 basis points to minus 0.290%, while the five-year yield fell 3.5 basis points to minus 0.270%.
Those yields are still off multi-month lows touched on Monday. In contrast, the U.S. 10-year Treasuries have fallen more than 30 basis points so far this week to a record low of 0.808%.
Still, investors are also bracing for more volatility in JGBs.
S&P-JPX JGB Vix, the gauge of investors’ expectations of JGB market volatility, rose to 3.63, the highest level since September 2016. (Reporting by Tokyo Markets Team; Editing by Devika Syamnath)