Japanese government bond futures tumbled on Friday as share prices soared on news that the US government is working on a plan to address systemic risks in US markets and deal with problem assets of financial firms. Senate Banking Committee Chairman Christopher Dodd said on Thursday that Congress will respond to a Treasury Department proposal for containing the Wall Street crisis after receiving details, which could occur sometime this weekend.
Hopes for comprehensive steps to tackle the crisis drove the Nikkei share average up 3.8 percent, following a sharp rise in US stocks overnight. Some market players cited futures selling by trend-following commodity trading advisers (CTAs), which are programme traders executing orders systematically in very large lots regardless of market conditions or fundamental views.
But most market players were reluctant to take huge positions ahead of the weekend, wary of the US developments and also of more JGB settlements due on Monday. Counterparties of failed investment bank Lehman Brothers were left seeking JGBs or cash they did not receive from Lehman. Heightening counterparty risks prompted investors to set aside ample cash, especially ahead of the end of the fiscal first half on September 30, leading to some selling of JGBs for cash, traders said.
"Players are not doing much beyond adjusting positions before the weekend, preparing for the market to swing either way next week," said a portfolio manager at a Japanese insurer. "Demand for cash before the end of the fiscal half year is extremely strong and players are not making fresh purchases of JGBs even if yields appear attractive," he said.
December 10-year JGB futures fell as much as 1.73 point to 136.61 before trimming some losses to stand at 137.02 down 1.32 point on the day. Futures hit a 5-month peak of 140.35 on Tuesday, when JGBs soared on safe-haven buying in the wake of Lehman's collapse. Futures hit an intraday high of 137.90 in the afternoon, in a brief, knee-jerk reaction to remarks by Bank of Japan Governor Masaaki Shirakawa.
Asked in parliament if a rate cut was a possibility, Shirakawa said central banks always look at all options when considering monetary policy. Analysts cautioned against inferring too much from the comments, saying Shirakawa was likely just stating the obvious.
"That sounds like a very general principle, something that is always the case," said Satoshi Yamada, senior strategist at Nikko Citigroup. Cash JGBs fared better than futures, which had outperformed cash JGBs and were seen as very pricy relative to cash bonds.
The benchmark 10-year yield dipped 1 basis point to 1.475 percent Five-year yields dipped 1 basis point to 1.110 percent after hitting a two-month high of 1.155 percent earlier on Friday. Two-year yields fell 2.5 basis points to 0.770 percent after hitting a two-month high of 0.825 percent.
"Yields currently offer a good bargain level that investors have been waiting for, so the cash JGB market is more solid," said Eiji Dohke, chief strategist at UBS Securities in Japan. "Cash JGB market players remain concerned about Japan's deteriorating economy. There are also doubts about how effective the latest US steps will be in resolving the financial sector problems," he said.
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