JGBs inch down

Japanese government bonds inched down on Monday as dealers sold futures to hedge against a debt auction the following day, while resilience in global stock markets prompted investors to shift money to equities from bonds. The Ministry of Finance will sell 1.9 trillion yen ($19 billion) in benchmark 10-year notes on Tuesday, the first major JGB auction since a two-year sale on April 23.
The 10-year auction is seen as an important test of demand after investors returned from Japan's Golden Week holidays, which started in late April. Tokyo's Nikkei stock average has soared in the past two weeks and booked a six-month closing high on Monday.
"JGB futures have been trapped in a range around 137 since early last month and may be due for a new range," said Koji Ochiai, senior market economist at Mizuho Investors Securities. "JGBs are likely to see more selling as global stocks remain on a rising trend."
June 10-year JGB futures dipped 0.06 point to 136.70, slipping further from a one-month high of 137.54 hit on May 1. The lead contract dropped as low as 136.49 in early trade. A fall below 136.39, struck during after-hours trade on April 9, would take futures to their lowest since late October. The benchmark 10-year JGB yield rose 1.5 basis points to 1.460 percent, having risen from a one-month low of 1.395 percent first hit on May 1. The two-year yield was unchanged on the day at 0.395 percent, while the 20-year yield rose 2 basis points to 2.055 percent.
The yield curve steepened as a result. A drop in US jobs numbers in April had a limited effect on JGBs as the fall was not a major surprise, analysts said. Even so, government debt stayed under pressure due to enhanced optimism that the worst might have passed for the global economy, they said. "As long as an economic recovery looks possible, investors hesitate to buy government bonds," said Makoto Yamashita, chief Japan interest rate strategist at Deutsche Securities.
But market players said JGBs were unlikely to plunge at a time when Japan's economy has slipped back into deflation, and due to expectations that the Bank of Japan will keep interest rates at 0.10 percent for some time. US government data showed on Friday that employers cut 539,000 jobs last month, the fewest since October, signalling the economy's steep decline might be easing and giving the stock market a boost.
The unemployment rate, however, soared to 8.9 percent, the highest since September 1983. Traders said the MOF was likely to sell the new 10-year bonds with a 1.4 percent or 1.5 percent coupon on Tuesday, up from the 1.3 percent coupons at the previous four auctions and the highest since the BOJ last cut interest rates in December.
The market will watch whether a higher coupon lures demand from institutional investors as many of them have remained on the sidelines since the start of Japan's financial year on April 1. Persistent worries over a possible spike in bond yields due to a scheduled increase in JGB issuance have kept investors reluctant to buy bonds.
The MOF said last month it would issue an extra 16.9 trillion yen of JGBs this fiscal year to pay for economic stimulus, with the extra issuance due to come to the market starting in July. Japanese opposition leader Ichiro Ozawa has told his party he will resign, media said on Monday, after an opinion poll showed a funding scandal involving a close aide was clouding his party's prospects in a looming election. Analysts said such a move by Ozawa would unlikely move the bond market.