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Japanese government bonds edged up on Tuesday with futures snapping a four-day decline as the market gained a bit of a breather with a bull run by Tokyo stocks slowing to a crawl. But JGB gains were limited by caution ahead of a 10-year auction next week and as weaker US Treasuries kept market sentiment subdued.
The 10-year US Treasury note yield climbed to a five-month high on Monday, due in part to economic recovery hopes, at a time when the steepening of the US yield curve has emerged as a worry for the JGB market. Other factors that have recently dogged JGBs were the weaker yen, which has pulled sharply back from a 14-year high struck against the dollar last month, and bullish Tokyo stocks, which rose to a four-month high this week.
The 10-year JGB yield fell 0.5 basis point to 1.295 percent on Tuesday after touching 1.305 percent, its highest in two-weeks. A rise above 1.310 percent would take the 10-year yield to a six-week high. "There's sporadic investor bargain-hunting demand around 1.300 percent for the 10-years, although it remains to be seen if the buying will continue in the wake of higher US Treasury yields and a weaker yen," said Shinji Nomura, chief fixed-income strategist at Nikko Cordial Securities.
March 10-year JGB futures rose 0.15 point to 139.53 after hitting a one-month low of 139.26 in an initial reaction to losses by Treasuries. The five-year/20-year yield spread was little changed at 163.5 basis points, hovering near a decade high of 165 basis points hit earlier in December and up from 101.5 basis points at the end of 2008.
The JGB yield curve has steepened this year, with longer-end bonds hurt by rising debt issuance and concerns about Japan's long-term fiscal health, while short- to medium-term JGBs have been supported by the Bank of Japan's policy of keeping interest rates close to zero. The 30-year yield rose 0.5 basis point to 2.300 percent. The 20-year yield declined 0.5 basis point to 2.110 percent.
The five-year yield fell 1 basis point to 0.475 percent. Traders said some pension funds sold long-dated JGBs and bought midterm debt, helping nudge the five-year yield lower. The two-year yield dipped 1 basis point to 0.150 percent, a four-year low. "Prospects of further BOJ easing has underpinned the market and kept bond prices elevated at relatively high levels. But there will be less pressure on the central bank to ease if the yen continues to weaken and stocks gain further," said Nomura at Nikko Cordial Securities.

Copyright Reuters, 2009

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