Japanese government bonds charged higher on Monday, with benchmark futures climbing towards a three-month peak, as investors took their cues from falls in Asian shares and a rally in US Treasuries.
The Nikkei average dropped 3.34 percent, its biggest one-day loss in nine months, while China's benchmark Shanghai Composite Index also fell sharply and was down 1.63 percent as of 0721 GMT. "Chinese shares are down and people are starting to think that US shares might fall sharply," said a trader for a major Japanese bank. Market players said the steep falls in share prices were probably triggering some unwinding of short JGB positions.
"It's not a question of whether current (JGB) levels are high or not," said the trader for a Japanese bank. March 10-year JGB futures climbed to 135.24 by the end of the day session, a gain of 0.42 point on the day. The lead futures contract had jumped to a high of 135.35 earlier, nearing a three-month high of 135.44 hit last week.
The benchmark 10-year JGB yield fell 4.5 basis points to 1.620 percent as of 0723 GMT. JGB yields dropped across the board. Yields on five-year and longer bonds dropped between 4 to 6 basis points, while two-year JGB yields slipped a relatively modest 3.5 basis points. The 30-year yield fell 6.0 basis points to a two-month low of 2.245 percent.
The three-month euroyen futures yield curve flattened as the December 2008 euroyen futures contract surged 0.06 point to 98.820, while the June 2007 contract rose by a relatively mild 0.015 point to 99.310 Besides share prices, JGBs are likely to take cues this week from a speech by Bank of Japan Deputy Governor Kazumasa Iwata on Wednesday, as well as a five-year JGB auction on Thursday.
"Growing expectations that recent falls in share prices may not just be a temporary correction are giving the JGB market support," said Masuhisa Kobayashi, chief JGB strategist at Barclays Capital.
JGBs were also supported by data on Friday that showed nation-wide core consumer prices were flat in January, reinforcing expectations the Bank of Japan will take its time before raising interest rates further from the current 0.50 percent. Despite the sharp falls in share prices and Monday's sharp gains in JGBs, market players said investors seemed cautious about chasing JGBs higher.
Investors are probably afraid that the turmoil in stock markets and gains in JGBs could prove fleeting, given solid economic fundamentals not only in Japan, but around the world, said Tatsuo Ichikawa, a JGB analyst at ABN Amro Securities.
"Although the price moves in equities have been significant, I think there are still many people who regard that only as a temporary factor," Ichikawa said. "I think many people are cautious because bonds could quickly return to their former levels if shares calm down," Ichikawa said.
Japanese companies increased spending on plant and equipment 16.8 percent in the October-December quarter compared with the same quarter a year earlier, a Ministry of Finance survey showed on Monday, up from a 12.0 percent rise in July-September.
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