JGBs rally on Nikkei

Japanese government bonds rallied on Monday, lifted by a plunge in Tokyo's Nikkei average and stronger US Treasuries. The Nikkei lost 3.1 percent on a stronger yen and after weak US consumer sentiment data released on Friday tempered expectations of an economic recovery, prompting investors to seek the perceived safety of government debt.
"About a third of the lift for JGBs came from Treasuries, another third from stocks and perhaps the remainder from GDP," said Koji Ochiai, chief market economist at Mizuho Investors Securities. Japan's April-June gross domestic product, which grew 0.9 percent from the previous quarter to mark its first expansion in five quarters, ending the economy's longest recession since World War Two. This, however, did not faze the bond market.
"The GDP's headline numbers were in line with expectations but many part of the contents were not particularly impressive," said Ochiai at Mizuho Investors Securities. The GDP data showed that capital expenditure in April-June marked the fifth straight quarter of contraction. The decline in the domestic demand deflator, an indicator of price trends, accelerated to 1.7 percent from an annual decline of 1.0 percent in the previous quarter as deflationary pressures mount.
The yield curve flattened as 10- to 30-year zones outperformed the midterm sector, which faces a 2.3 trillion yen five-year auction on Tuesday. Analysts said although strong underlying demand exists for five-year debt from investors like domestic banks, the sudden drop in yields on Monday may force some potential buyers to wait until yields rise back to more affordable levels. September 10-year futures climbed 0.61 point to 138.59 after hitting a one-month high of 138.69.
Market players said futures were partly boosted by buying from fast money accounts like hedge funds, which had been prompted to offload positions in stock futures. The two-year yield dipped 0.5 basis point to 0.255 percent and the five-year yield fell 2 basis points to 0.670 percent.
The benchmark 10-year yield dropped 3.5 basis points to 1.340 percent, its lowest level since July 21 and down from a seven-week peak of 1.460 percent struck a week ago. The 20-year yield declined 2.5 basis points to 2.090 percent. The 30-year yield dropped 3 basis points to 2.250 percent. The two-year/20-year yield spread tightened by 2 basis points to 183.5 basis points, pulling back from a four-year high of 191.5 basis points hit the previous week.