JGB yields ease as Treasury rally offsets BOJ hike expectations

Japanese government bonds advanced on Friday, pulling shorter-term yields back from historic peaks, as a rally in U.S. Treasuries provided support even with growing conviction that the Bank of Japan will raise interest rates next month.

The benchmark 10-year JGB yield slipped 1.5 basis points to 2.855%, trimming its weekly advance. Yields move inversely to bond prices.

The move mirrored a broad decline in U.S. Treasury yields on Thursday, after softer-than-expected producer price data cooled speculation about a Federal Reserve rate increase next month.

"Following the decline in U.S. Treasury yields and the drop in crude oil prices, conditions appear favourable for buying domestic bonds," said Takayuki Miyajima, senior economist at Sony Financial Group. "On the other hand, speculation about an early interest rate hike by the Bank of Japan continues to weigh on the market."

Data released on Thursday showed Japan's July producer price index rose 7.2% year-on-year, slightly below forecasts but still elevated enough to reinforce expectations for a rate hike.

Adding to the hawkish backdrop, Mitsuhiro Furusawa, Tokyo's former top currency diplomat, told Varta Wire that Japan may signal the chance of faster-than-expected interest rate increases to stem the yen's decline.

The two-year yield, the most sensitive to BOJ policy rates, slid 0.5 basis point to 1.64%, retreating from a 31-year high touched on Thursday. The five-year JGB yield was flat at 2.12% after reaching a record 2.125% in the previous session.