JGB futures scale 17-month high as equities slump

Japanese government bond (JGB) futures rallied sharply to a 17-month high on Friday as slumping equities raised doubts about chances of the Bank of Japan raising interest rates in the near term.
Benchmark 10-year JGB futures posted their largest one-day gains since November 2003, while yields across the curve fell to multi-month lows.
The Nikkei average dived more than 5 percent to post its biggest percentage loss since the September 11 attacks as sharp gains in the yen triggered concern about Japan's economic outlook and profit prospects, pushing down exporters.
Fears of a worsening global credit crunch have kept investors dumping risky assets such as equities and carry trades and investing in safer government securities. "JGBs are supported by flight-to-quality buying as the global trend of risk reduction intensifies," said Makoto Yamashita, chief JGB strategist at Lehman Brothers.
"JGB yields aren't really at a level where you want to keep buying, but there is no choice but to go along with the global trend, as attempts to go short have repeatedly got stamped."
Traders said investors also took their cues from the yield on the two-year Treasury note briefly falling below 4.0 percent on Thursday. JGB 10-year futures rose as high as 136.31 up 1.26 point on the day and the highest level since March 2006. Futures ended the day session up 1.22 point at 136.27.
The two-year yield hit a four-month low of 0.810 percent down 5.5 basis points on the day. The benchmark 10-year yield plunged 7.5 basis points to 1.580 percent a five-month low.
The five-year yield tanked 9.5 basis points to 1.090 percent, inching up from an 11-month low of 1.085 percent hit earlier in the session. "The JGB market is getting a boost from the risk reduction moves and price swings are sharper in a market where major Japanese players are absent due to Japanese summer holidays," said a dealer at a Japanese securities firm.
The fall in the stock market and global financial turmoil have further scaled back expectations for a BOJ rate hike at its policy meeting next week, traders said. Swap contracts on the overnight call rate showed that investors now see only about a 10 percent chance of a 25 basis point BOJ rate rise to 0.75 percent at the central bank's meeting on August 22-23, down sharply from 75 percent at one point last week.