Japanese government bond futures hit a three-month low on Friday, hurt by a rebound in the Nikkei share average a day after its worst fall since the 1987 crash. JGB futures rose in early trade a day after an auction of five-year notes showed solid investor demand for safe-haven government debt on growing concerns about a global recession.
But futures soon headed south as the Nikkei share average rose 2.8 percent, rebounding a little after suffering its biggest one-day drop since the 1987 crash on Thursday. Traders said many investors remained on the sidelines, afraid of being caught in unusually high volatility in the market and keeping movements exaggerated.
"Many bond investors are sitting on their hands as both the US and Japanese stock markets remain very volatile," said Hidenori Suezawa, chief fixed-income strategist at Daiwa Securities SMBC. December 10-year futures fell 0.16 point to 135.75 after striking a three-month low of 135.61. Volume was just 14,683 lots, the lowest since June 2006.
The benchmark 10-year yield was unchanged at 1.585 percent, crawling towards a three-month high of 1.630 percent struck on Tuesday. Analysts said many overseas hedge funds involved in the market, such as commodity trading advisers (CTAs), have been yanking funds out to build up their cash piles as they brace for investor redemptions.
"A lot of hedge funds are facing redemptions, so they are unwinding positions, raising cash and parking it in short-term Treasuries," said Freddy Lim, chief Japan interest-rate strategist at Morgan Stanley. "A lot of CTAs are gradually unwinding their long positions."
In the three weeks through October 11, foreign investors sold nearly 3 trillion yen ($30 billion) of yen bonds, most of which were JGBs. That selling partly explains a recent slump in JGBs even though the Nikkei has plunged nearly 24 percent this month. Among the measures being considered to help embattled banks and financial institutions, Japanese officials were looking at easing rules on mark-to-market accounting in a move to join global authorities trying to contain the crisis fallout.
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