Yields on Japanese government bonds high on optimism

Yields on Japanese government bonds jumped to a five-month high yield of 1.475 percent on Thursday as a result of continuing optimism about the Asian nation’s economic recovery and on speculation that the Bank of Japan’s zero interest rate policy might end early in 2006.

The two-year government bond yield rose to a one-year high. Yields fell, however on US Treasury bonds.

Weak retail sales were one factor in the higher bond prices, but investors were waiting for the results of the sales of $13 billion in 10-year bonds, so prices did not go too high.

Sales of 3- and 5-year bonds earlier in the week saw generally good demand, but bids from overseas and institutional buyers were unexpectedly low, at 25 percent.

The weaker demand could mean that yields will have to go higher before foreign buyers will be attracted to the market again.

Analysts are watching bond prices and yields carefully, as they are currently defying the conventional wisdom that as interest rates rise, prices fall and yields rise.

On Thursday, however, the 10-year Treasury bond lost 0.6 basis points as yields fell to 4.39 percent, while 2-year yields were at 4.116 percent, 0.4 basis points lower.

Meanwhile, yields on eurozone government bonds were down as prices rose. The 10-year Bund lost 0.7 basis points to yield 3.336 percent.

In the UK, however, yields were up on the 10-year gilt, which gained 0.5 basis points to yield 4.401 percent.