JGB futures barely move

Japanese government bond futures were little changed on Monday, with the prospect of a big rise in JGB issuance keeping investors on the sidelines. The government said on Friday it would issue more than 10 trillion yen ($100 billion) of debt in the year to March 2010 to finance its latest stimulus package, its largest ever at about $154 billion.
That debt will come on the top of 33 trillion yen of bond issuance to fund the governments record budget for the current fiscal year. Market players are keen to see how the government allocates the new debt issuance in terms of maturities.
The Ministry of Finance will hold a meeting with JGB primary dealers on Friday, and some market players see this as part of government preparations for deciding on these allocations. "There are investors wanting to buy JGBs with a chunk of money in their hands," said Mari Iwashita, chief market economist at Daiwa Securities SMBC. "But investors prefer not to move now, knowing they could pick up bonds cheaper later."
Japanese institutional investors are cash rich at this time of year as Japans financial year starts on April 1. June futures edged up 0.02 point to 136.70 after hovering in a tight 0.21 point range. The lead contract hit a 5-1/2-month low of 136.43 last week as worries about a jump in debt issuance to finance new stimulus steps prompted investors to dump JGBs. The benchmark 10-year yield was unchanged on the day at 1.450 percent. It touched a five-month high of 1.490 percent on Friday.
Super-long bonds with maturities longer than 10 years underperformed the rest of the market, pressured ahead of the MoFs 30-year JGB auction on Tuesday. The 20-year yield was up 1 basis point at 2.120 percent, while the 30-year yield rose 1.5 basis points to 2.210 percent, its highest since mid-December. The two-year yield edged down 0.5 basis point to 0.450 percent, while the five-year yield dipped 1.5 basis points to 0.850 percent. The yield curve steepened slightly as a result.
The MoF is likely to boost issuance of one-year Treasury discount bills and bonds with maturities of two, 20 and 30 years, said Makoto Yamashita, chief Japan interest rate strategist at Deutsche Securities. The ministry is also expected to increase the amount its offers at its liquidity-enhancing JGB auctions, he added.
A rise in yields in the short-term sector would be limited thanks to the Bank of Japans low interest rate policy, while yields in 20- and 30-year bonds would likely climb until long-term investors start to pick them up, Yamashita said.
"The yield curve has scope for a further rise," Yamashita said. US banks including Goldman Sachs, J.P. Morgan and Citigroup are set to report first-quarter results this week. Bond traders will watch how stock markets react to these earnings reports.
A slide in share prices on any negative surprise from US bank earnings could ignite a sharp JGB rally, a senior bond trader at a European brokerage said. "JGB futures have started to look cheap as a result of the heavy sell-off sparked by supply concerns," the trader said.
"They look ready for a rebound. A fall in stocks, the MoFs meeting with dealers or buy signals on technical charts could trigger active debt buying soon." In fact, there are few market participants expecting another wave of bond sell-offs as Japans economy continues to struggle.