JGB futures edge up on bleak economic data

Japanese government bond (JGBs) futures edged higher on Friday on data showing that an economy already in recession was facing a sharp slowdown and receding inflation. Japan's industrial output declined 3.1 percent in October from the previous month, significantly lower than a 2.5 percent drop expected by the market, data showed on Friday.
Manufacturers warned of deeper cuts ahead. Annual core inflation slowed to 1.9 percent in October, with sliding energy prices heightening the risk of Japan slipping back into deflation.
Besides the gloomy data, JGBs initially drew support from month-end demand from passive-strategy investors, who often extend the duration of their bond portfolios at the end of the month.
But JGB futures trimmed gains and cash JGBs came under pressure in the afternoon as the Nikkei share average rose 1.7 percent and market players braced for next week's 10-year bond auction. "There may also have been some moves related to yield curve plays," said Naomi Hasegawa, senior fixed income strategist for Mitsubishi UFJ Securities.
Position unwinding may have put pressure on longer-end JGBs while supporting the short- and medium-term sector, she said.
December 10-year JGB futures gained 0.06 point to 139.38. Trading volume was a light 13,895 lots. The benchmark 10-year JGB yield rose 3 basis points to 1.400 percent, after falling to 1.355 percent earlier, matching a low hit in early October.
A fall to below 1.355 percent would have taken 10-year yields to a seven-month low. Market players said trading was subdued, limiting bonds' advance, with market players in wait-and-see mode, ahead of the Finance Ministry's auction of 1.9 trillion yen ($20 billion) in 10-year JGBs next Tuesday.
The yield on the two-year JGB auctioned the previous day dipped half a basis point to 0.595 percent. "The 0.6 percent coupon on the new two-year is being embraced by buyers," said Tatsuo Ichikawa, a fixed-income strategist at RBS Securities.
REPO RATES HIGH:
Analysts said yields in the JGB short end had limited scope to decline further as long as repo market rates were elevated. Repo rates have risen recently on festering concerns about counterparty risk, exerting upward pressure on short-end JGB yields. Market players use the repo market to swap bonds for cash.
The Bank of Japan pumped trillions of yen into the market earlier this month to reduce tightness in the JGB repo market, bringing repo rates to around 0.40 percent from near 0.50 percent earlier in the month.