Japanese government bonds erased losses on Friday, with benchmark yields dropping from a 7-week high in line with rallying US Treasuries after Speaker of the US House of Representatives John Boehner said his tax bill aimed at solving the US "fiscal cliff" budget impasse lacked the votes to pass. Boehner said late on Thursday it was now up to President Barack Obama to work with fellow Democrats in the Senate to avert the automatic spending cuts and tax hikes from taking effect next month.

The news prompted investors to seek safe-haven assets, lifting benchmark US 10-year Treasuries and pushing down their yields. The 10-year JGB futures contract ended up 0.04 point at 144.04, after dropping as low as 143.86 in the morning session before news that Boehner had scrapped his bill. Volume was moderate, with 32.246 contracts trading, the lowest this week. Futures finished last week at 144.30.

Yields on cash 10-year JGBs lost 1 basis point to 0.760 percent, falling as low as 0.755 percent at one point. Before the US budget impasse news, yields rose as high as 0.780 percent, matching Wednesday's high, which was their loftiest level since November 2. 10-year yields ended last week at 0.725 percent. "It's all the US story now," said Shogo Fujita, chief Japan bond strategist at Bank of America Merrill Lynch.

On Thursday, the BOJ expanded its asset-buying and lending programme (APP) by 10 trillion yen ($119 billion) to 101 trillion yen, an expected easing move against a backdrop of rising political pressure. Shinzo Abe, the country's next leader after his Liberal Democratic Party's landslide in Sunday's elections, has called on the bank to boost efforts to take more aggressive steps to beat deflation. Yields on 20-year bonds fell 2 basis points to 1.710 percent, while those on 30-year bonds lost 3.5 basis points to 1.930 percent.

The 30-year yield's spread over 10-year yields stood at 1.170 percentage points, its narrowest since mid-November and down from 1.255 percentage points on December 4, which was its highest since March 2008. Japan's financial markets will be closed on Monday in observance of the Emperor's birthday, and many markets around the world close on Tuesday for Christmas. Bank of Japan data showed on Friday that foreign ownership of outstanding Japanese government bonds rose to a record at the end of September of 86 trillion yen ($1.02 trillion), up 11.1 percent from the same period a year earlier. Benchmark JGBs have lost 5.4 percent in 2012 in dollar-based terms as of Friday, according to Reuters data.

Copyright Reuters, 2012