Japanese government bonds fell on Friday as Tokyo shares pared half of their losses, prompting bond investors to take profits on earlier gains and trim positions ahead of key US jobs data due later in the day. The Nikkei stock average fell 3.6 percent to 8,583.00, its lowest close in a week. At one point on Friday, it had tumbled more than 7 percent before bargain hunting trimmed losses.
Traders said programme traders were seen buying Nikkei futures and selling JGB futures while others cited talk of stock buying and bond selling by Japanese pension funds. Trading was subdued ahead of US employment data and the tightness in the JGB repurchase market continued to weigh on the short- to medium-term JGB sectors, traders said.
"In addition to the bounce in shares, wariness before the US jobs data is prompting players to trim positions," said Atsushi Ito, a fixed-income strategist at Morgan Stanley. Ito said relief that the market smoothly absorbed the 40-year JGB auction may also have made it easier for investors to take profits from earlier gains. But he warned that thin volume may be exacerbating price moves.
December 10-year JGB futures fell 0.60 point to 137.40, off an earlier high of 138.40. Volume picked up slightly from the previous day, but was still below 30,000 contracts.
The benchmark 10-year yield rose 2 basis points to 1.510 percent, after falling to a low of 1.460 percent earlier in the day. The five-year yield rose 2.5 basis points to 0.915 percent while the two-year yield also rose 2.5 basis points, to 0.570 percent. The 20-year yield was unchanged at 2.155 percent.
"The bond market is focused on the money market, where relatively high repurchase rates are preventing JGB yields at the short end of the curve from declining further," said Takafumi Yamawaki, a senior fixed-income strategist at BNP Paribas.
Despite an interest rate cut by the Bank of Japan last week, the first in seven years, traders said money market rates, particularly on terms to a week and beyond, remain high amid limited market liquidity due to players' reluctance to lend.
A senior trader at a Japanese bank said investors were not likely to chase yields lower much from current levels. With JGB repo rates hovering near 0.5 percent, the two-year yield was not appealing at current levels, while demand for 10-year bonds was likely to wane if the yield fell below 1.5 percent, the trader said.
The Ministry of Finance issued 200 billion yen ($2.05 billion) in 40-year JGBs on Friday, drawing decent demand, traders said. It was the third auction of the maturity, which was introduced in November 2007. The MOF set a 2.4 percent coupon for a second re-opening of the No 1 issue.
"It is the third auction of the maturity and the market no longer treats the tenders as a novelty, which explains the lower bid-to-cover," said Hiroto Kuwahara, chief quantitative analyst at Mitsubishi UFJ Securities. "The 40-year bonds are likely to begin attracting more demand from investors such as life insurers once liquidity improves with further issuance," he said. On Thursday, a senior MOF official told Reuters that the ministry plans to regularly issue 40-year JGBs to meet investor demand for super-long maturities.
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