JGBs firm but trade subdued before half-year end

TOKYO: Japanese government bond futures were mostly flat on Thursday as domestic players refrained from trading actively ahead of half-year book closing this week.

But ongoing uncertainty about a resolution to the debt debacle in Europe boosted fears of a slowdown in the global economy, underpinning demand for government bonds.

Market players expect the German parliament to pass a bill on new powers for the European Financial Stability Facility (EFSF), but a focal point is whether there will be many dissenters within Germany's ruling coalition, players said.

December 10-year JGB futures were up 0.03 point at 142.48. But trading volume remained subdued at 8,742 lots, far below the average daily volume of around 22,000 lots so far this year, as most Japanese investors stayed on the sidelines ahead of half-year book closings this week.

"Most people should be finished with their position adjustments before book closings and there is not much incentive to move unless shares fall sharply," said a fund manager at a Japanese asset management firm.

Cash bonds were mostly firm, with the 10-year yield down 0.5 basis point at 1.000 percent, remaining near a 10-month low of 0.965 percent marked last week.

Superlongs were mixed as the 20-year yield declined 1.5 basis point to 1.715 percent, while the 30-year yield was flat at 1.910 percent .

CALLED INTO QUESTION

But many investors were eager to take profits at yields below 1 percent, as historically falls below that level have not been sustainable and are always followed by selloffs, such as in August and October last year.

Some market players said JGB's safe-haven status may increasingly be called into a question if Japan's current account balance tilts further towards deficit.

Japan normally has a current account surplus -- saving more than it spends outside -- making it possible to finance its huge public debt domestically.

But upside room for JGB yields is also seen limited. "Even if the euro zone debt crisis eases, structural problems in the bloc will remain, and investor risk appetite won't be strong as it used to be," a trader at a Japanese bank said.

Strategists expect investor demand to increase above 1 percent on the 10-year yield, and they see the yield staying around that level looking beyond book closings.

At the short-end of the market, the overnight call rate was trading at around 0.08 percent. There was little sign of a funding strain for the financial half-year ending on Sept 30, with the overnight repo rates trading around 0.10 percent.