Japanese government bond futures hit a four-month high on Monday as some market players rushed to cover short positions, with moves exaggerated by thin trading volume. JGBs slipped in early trade as a fall in US Treasuries late last week and a stock market rally prompted investors to trim holdings of government debt.
But bond futures suddenly jumped in mid-morning, boosted by technical trading as those who had bet JGBs would drop sharply decided to square short positions after the debt market showed some resilience. The announcement of the Bank of Japan's "rinban" operation to buy JGBs outright also prompted buying back of JGB futures, traders said.
Traders said the light volume illustrated how easily the market was being moved. Many investors remained on the sidelines ahead of the Ministry of Finance's 20-year debt auction on Tuesday. "Given limited gains in the cash market, I bet real investors are not picking up bonds much," said Koji Ochiai, senior market analyst at Mizuho Securities.
September futures climbed to a four-month high of 138.39 before slipping back to 138.10 up 0.41 point on the day. The lead contract fell as low as 137.38 in early trade. The benchmark 10-year yield slipped 1 basis point to 1.430 percent after striking a four-month low of 1.405 percent earlier in the day. The five-year yield, which has the strongest correlation with bond futures, was down 2 basis points at 0.995 percent.
But the two-year yield edged up 0.5 basis point to 0.690 percent following a report the government will unveil an economic stimulus package worth around 8 trillion yen ($72.7 billion) to help ease the pain from higher oil and food prices. The ruling Liberal Democratic Party's policy chief said on Monday the planned package could be worth 2-3 trillion yen.
"The possibility of an increase in government bond issuance is making bond investors nervous, although there may be little chance of such a step under Prime Minister Yasuo Fukuda," said Tetsuya Miura, a bond strategist at Shinko Securities. The 20-year yield was unchanged on the day at 2.110 percent.
The market awaited comments from BOJ Governor Masaaki Shirakawa, who is scheduled to speak later in the day. But analysts expect his comments to be largely in line with remarks the BOJ made after its August 18-19 policy meeting, at which the central bank left interest rates unchanged at 0.5 percent.
The BOJ said last week that economic growth had been sluggish due to weaker growth in exports as well as high energy and raw material prices. But it stuck to the view that the economy would eventually return to moderate growth.
JGBs have been firm for the past month, supported by expectations that a global slowdown would hurt the Japanese economy, prompting the BOJ to stand pat on rates for some time. The Nikkei average ended up 1.7 percent. US Treasuries fell on Friday as a surging stock market unwound the bid for safe-haven government bonds and traders cut prices ahead of supply.
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