Ten-year Japanese government bond futures scaled a 3-month high on Monday as worries about ongoing turmoil in global credit markets stirred doubts about the chances of a Bank of Japan interest rate rise this month.
About one-quarter of market players responding to a Reuters survey on Monday said they expected the BoJ to raise rates at its August 22-23 policy meeting, down sharply from roughly two-thirds in a poll taken just two weeks ago.
Many in the market have pushed back their expectations for a rate rise to September, with 21 respondents saying they see the BoJ lifting its overnight call rate target to a 12-year high of 0.75 percent next month from 0.50 percent now.
Receding expectations for a BoJ rate rise this month, and the fact the Nikkei share average trimmed early gains and rose just 0.2 percent on the day gave JGBs support, market players said.
The JGB market could see some more volatility in the near-term after seesawing last week, said Akitsugu Bandou, senior strategist for Okasan Securities. "JGBs are up today, but conditions aren't very stable," Bandou said. "If overseas equities rebound tonight, we could see the trend change," he said.
JGB 10-year futures rose 0.12 point to 134.40 having trimmed some gains after rising as high as 134.56, the highest level since May 1. The 10-year yield was flat at 1.715 percent after falling as low as 1.705 percent, matching a low hit on Friday that was the lowest since late May.
The yield curve steepened as five-year yields fell 2.5 basis points to 1.260 percent while 20-year yields rose 3.5 basis points to 2.170 percent. Earlier, the five-year yield fell as low as 1.250 percent the lowest level since May 23. Two-year yields fell 1.5 basis points to 0.925 percent after dropping to as low as 0.920 percent earlier this session, the lowest since late May.
Data showing that Japan's gross domestic product grew a meagre 0.1 percent in the April-June quarter had limited market impact, although it helped reinforce expectations that a shake-out in global markets may prompt the BoJ to rethink a rate hike this month.
Swap contracts on the overnight call rate showed that investors now see a roughly 30 percent chance of the BoJ raising rates to 0.75 percent in August, little changed from Friday but down from as high as 75 percent on Thursday.
"To a large extent, the market has already factored in the possibility that there will be no rate rise (in August)," said a trader for a Japanese brokerage house, adding that short- and medium-term JGBs may have limited room to rally.
"There is a possibility that the chances of a September rate rise will be left open somehow," the trader said, adding that such clues may come from BoJ Governor Toshihiko Fukui's post-meeting news conference or the vote tally at next week's policy meeting.
The BoJ pumped 600 billion yen ($5.1 billion) into the banking system in a one-week operation this session as tight conditions in money markets abroad spilled into Japan's call market. The move came amid a squeeze in US and European money markets that has driven overnight rates above targets, forcing major central banks to inject about $150 billion in overnight funds on both Thursday and Friday.
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