JGB 10-year yield slips

The benchmark 10-year Japanese government bond yield slipped back towards three-year lows on Friday in thin trade ahead of Japan's fiscal year-end on March 31.
JGBs were supported by lingering fears of a US recession and doubts about the outlook for the Japanese economy, which have led to market expectations that the Bank of Japan seems more likely to cut interest rates this year than raise them.
But activity was subdued as investors took a breather after recent market swings and as they turned their focus to key events next week, including the BOJ's tankan survey on business sentiment and US jobs data, analysts said.
"The JGB market is now at expensive levels, and there is some nervousness among investors," said Akitsugu Bandou, senior strategist of Okasan Securities. But the mood may change and JGBs could extend gains if the tankan and the US employment data come in weak and lead traders to consider more seriously the possibility of the Bank of Japan lowering interest rates, he said. The quarterly tankan is expected to show a sharp deterioration in corporate sentiment due to the global credit crisis, rises in raw material costs and a fall in the dollar. The tankan will be released on Tuesday, the same day as a 10-year JGB auction. The US jobs data is due next Friday.
The benchmark 10-year yield fell 2 basis points to 1.250 percent, edging back towards a three-year low of 1.215 percent hit on Wednesday. Swap contracts on the overnight call rate show that investors now see a roughly 50 percent chance of the BOJ lowering interest rates from the current 0.50 percent by the end of the year.
June 10-year JGB futures rose 0.03 point to 140.80. Total trading volume was a light 12,678 contracts. JGB futures have seen some volatile swings over the past few weeks as the global credit market crisis sparked a massive unwinding of market bets that went sour.
In a sign of the recent market anomalies caused by the unwinding of loss-making bets, the 30-year yen swap spread was in negative territory, at around minus 8 basis points. The 30-year JGB yield rose 1 basis point to 2.335 percent. 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.
JGBs showed little reaction to data showing that core consumer prices in Japan rose 1.0 percent in February from a year earlier, in the biggest increase since March 1998.
While the rise was slightly above market expectations, economists said consumer prices were being led higher by rising oil and food costs rather than a stronger economy. "There is no change to the situation where food and oil prices are pushing up core and overall CPI," said Seiji Shiraishi, chief economist at HSBC Securities.
"Rises in the prices of everyday necessities have led to a worsening in consumer sentiment and pose a risk to personal consumption," Shiraishi said.