JGB futures dip

Japanese government bond futures fell on Monday in holiday-thinned trade, taking a breather from the volatility seen last week when hedge funds and other players rushed to unload loss-making trades.
Market anomalies such as negative long-term swap spreads persisted, however, although to a lesser degree compared to what was seen last week after ailing US investment bank Bear Stearns agreed to a take-over offer from J.P. Morgan Chase.
That news had been seen as highlighting the depth of the damage caused by the tumult in US credit markets, and further accelerated moves by foreign hedge funds and other market players to unwind positions that had soured. "Things have calmed down some, but the market is still broken," said a senior trader for a major Japanese bank.
Normally bond dealers would seek profit opportunities from market anomalies, but such moves are now absent, he said, adding that dealers who trade with hedge funds may be carrying positions they need to unwind and shy about taking risks as a result. June 10-year JGB futures fell 0.25 point to 140.65 retreating from a five-year peak of 142.00 hit last week in evening session trading.
Trading volume was the lightest seen this year at 23,700 lots, with many overseas investors away for the Easter holiday break and Japanese investors sidelined ahead of fiscal year-end book closings at the end of the month.
Despite the fall in futures, the benchmark 10-year cash JGB was bought and the yield fell 2 basis points to 1.250 percent edging back toward a three-year low of 1.230 percent hit last Monday. The 20-year yield fell 3 basis points to 2.000 percent, having fallen over 20 basis points from last week's peak, hit when funds rushed to dump bets for the yield curve to flatten.
The 30-year yield dropped 4.5 basis points to 2.290 percent. The 20-year swap spread still remained in negative territory and stood at around minus 1 basis point. That spread had at one time last week collapsed to around minus 20 basis points, mainly as hedge funds unwound so-called box trades.
Normally, swap rates are higher than government bond yields because of the counterparty risk involved in derivative contracts, especially in the current shaky environment when investors fret about the credit risk of financial firms.
Traders said irregularities such as negative long-term swap spreads were expected to be corrected eventually as the unwinding of bad bets was likely to have peaked over the past couple of weeks.
"Recent activity was driven by unwinding of bad positions and Japanese investors have been largely absent, probably with the intention to book profits or buy on dips. But they are not active ahead of the fiscal year-end," said Makoto Yamashita, chief JGB strategist at Lehman Brothers.
Last week, the Financial Times reported that hedge fund Endeavour Capital told investors it lost 27 percent in box trade bets in JGBs. The newspaper also said other well-known hedge funds had lost hefty sums in JGB trades.
Once volatility eases and the new fiscal year begins on April 1, giving domestic players more freedom in asset allocations, traders said JGBs will draw support from weakness in Japan's economy, as underlined by a government survey released on Monday that showed big manufacturers' confidence in business conditions sank to a new low in the three months to March.
The Ministry of Finance will offer 1.7 trillion yen ($17.11 billion) of two-year JGBs on Tuesday. Given growing market views for yields to stay under downward pressure, some of the big investors such as banks may want to buy two-year bonds to get an early start in portfolio allocations for the new fiscal year, but most investors were unlikely to rush to buy, limiting any boost to the market, traders said.