Japanese government bond futures hit 14-month high

Key 10-year Japanese government bond (JGB) futures shot to a 14-month high on Monday as worries about slowing US growth prompted investors to buy bonds and push Tokyo shares to a four-month closing low. The Nikkei share average tumbled 3.8 percent to finish at 10,938.44, marking its biggest one-day percentage loss since May 10, 2004. But analysts said bond yields had little scope to drop further as many investors saw current levels as too low given their expectations of higher interest rates later in the year.
"Seasonal buying at the start of the new financial year has helped bolster demand but from current levels, buying momentum is expected to get slower and slower," said Hiroyoshi Sandaya, analyst at Goldman Sachs.
"It's difficult to sustain buying at current low yield levels," he said.
Japan's major banks, traditionally big buyers of JGBs with up to 10-year durations, have put a 10-year yield around 1.3 percent as the low range of their interest rate projections for fiscal 2005/06. The top four banks together account for about 8 percent of JGBs outstanding.
They have listed 10-year yields at around 1.5-1.6 percent and five-year bonds at around 0.6 percent as attractive levels for buying.
The June JGB futures contract jumped as high as 140.20, its priciest since February 27, 2004. It ended the Tokyo day session up 0.33 point at 140.17.
The yield on the benchmark 10-year cash bond dipped 3.5 basis points to 1.270 percent, its lowest since February 3 this year. A drop below 1.265 percent would take the benchmark yield to its lowest since March 2004.
The 10-year yield has fallen almost 70 basis points from a four-year high of 1.94 percent hit last June and some 25 basis points since scaling a three-month high of 1.535 percent in late February, amid fading optimism about Japan's economy.
The yield curve flattened across the sectors, with the five-year yield shedding 2.5 basis points to 0.475 percent, below 0.5 percent for the first time since March 2004.
"We're seeing a global flight out of stocks and into bonds," said Hidenori Suezawa, chief fixed-income strategist at Daiwa Securities SMBC.