JGBs edge up

Japanese government bonds edged higher on Thursday, supported by a surge in US Treasuries the previous day and a fall in Tokyo shares after the yen hit a two-month high versus the dollar. But the upside was capped before next week's auctions of two- and 20-year JGBs and as the market neared a key resistance level, while participants eyed a two-day Bank of Japan policy meeting ending on Friday.
"Lower stocks and stronger Treasuries are supportive for JGBs. But the advance is slowing as the yield on the 10-year bond comes closer to 1.4 percent," said Katsutoshi Inadome, a fixed-income strategist at Mitsubishi UFJ Securities. "Stronger incentive is needed for a break below 1.4 percent."
The 10-year yield has dipped below 1.4 percent twice this month but failed to remain beneath that threshold. A drop below 1.395 percent would take it to a seven-week low. The 10-year yield has declined steadily from a five-month peak of 1.490 percent hit in April, when the market was dogged by supply concerns as Japan looked to boost debt issuance to finance a record stimulus package to combat the recession.
But supply concerns have eased somewhat since then, nudging yields lower as the market has taken a string of auctions in its stride so far this month. Participants are now eyeing whether investor demand continues to emerge at next week's two- and 20-year JGB auctions. A more immediate focus is the BOJ's two-day monetary policy meeting that ends on Friday.
With the central bank widely expected to keep interest rates steady at 0.10 percent, participants are eyeing whether it raises its assessment of the economy amid signs of a recovery in exports and production and if it discusses expanding the range of eligible collateral for market operations.
The Nikkei business daily has reported that the central bank is considering allowing financial institutions to put up US Treasury bonds and other foreign debt instruments as collateral for open-market operations, and that it may slightly upgrade its assessment of the economy.
"The BOJ raising its economic assessment could pressure JGBs as it could lift the stock market. On the other hand, bonds could be supported if the BOJ opts to accept foreign bonds as collateral, as that would reinforce its commitment to an easy monetary policy," said Inadome at Mitsubishi UFJ Securities.
June 10-year JGB futures edged up 0.05 point to 137.23. The five-year yield fell 0.5 basis point to 0.790 percent. The benchmark 10-year yield dipped 0.5 basis point to 1.415 percent after touching 1.410 percent. The 20-year yield dropped 1 basis point to 2.085 percent. The Nikkei stock average fell 1.2 percent. US Treasuries rallied on Wednesday after minutes from the latest Federal Reserve meeting showed central bank officials had discussed buying more securities including government debt to help fuel the economy.