Japanese government bonds trim gains

Japanese government bond futures slipped on Monday, retreating from a two-month high on selling of midterm maturates after investors felt a rally in the middle to short end of the yield curve had gone too far.
JGBs received boost from gains in Treasuries late last week, when worries about more problems in the US supreme mortgage sector overshadowed an upbeat US payroll report.
But futures relinquished their gains, pushed lower by selling mainly of the five-year bond for longer maturates. "If you're going to buy, there are no maturates to buy other than the long end," said Akihiko Inoue, a market analyst at Mizuho Investors Securities.
He said investors wanting to buy had little choice but to sell shorter maturates for longer ones, given that a rally since last month has pushed the five-yield near its lowest level since March 2006, making the middle to short end of the curve relatively more expensive than the long end.
Market participants said five-year notes had also come under selling pressure as dealers began to hedge against an auction in the maturity later in the week. December futures ended 0.13 point lower at 135.96, pulling away from 136.32 hit in trade for the first time since mid-September and brushing off a 1.5 percent fall in the Nikkei share average.
The yields on the benchmark 10-year JGB slipped half a basis point to 1.580 percent after hitting 1.565 percent. The five-year yield rose 1.5 basis points to 1.100 percent. Longer maturates were supported, with the 20-year yield slipping 1.5 basis points to 2.120 percent.
JGB gains have been driven mainly by a surge in Treasuries on concerns about a credit market crunch and interest rate cuts by the Federal Reserve, which have kept the Bank of Japan cautious about raising rates further from 0.5 percent.
Lingering credit problems were underlined by the resignation of Citicorp chief executive Charles Prince on Sunday after the US financial giant said it might write down $11 billion on exposures to US supreme mortgages.
"Domestic investors see turbulence in US financial markets leading the Fed to cut rates more over the course of the next year. In this situation, domestic investors believe the BOJ will keep a wait-and-see stance," said Makoto Yamashita, chief JGB strategist at Lehman Brothers. But market participants said JGBs were becoming even more difficult to buy given current low yields and the overall view that the BOJ will raise rates at some point in the future.