JGB futures fall

Japanese government bond futures fell on Thursday, with two consecutive days of gains halted by Tokyo stocks rising to a 15-month high and weaker US Treasuries. The yield curve flattened as superlong JGBs bucked the trend by climbing following a well-received 40-year bond auction. March 10-year JGB futures dropped 0.14 point to 138.97 after two straight days of gains.
Midterm to 10-year JGBs also sagged as Tokyo's Nikkei stock average jumped 1.6 percent to a 15-month high. "JGBs were quick to lose momentum as recent gains were due mostly to short covering by speculative players," said Shinji Nomura, chief fixed-income strategist at Nikko Cordial Securities. "Investors have been buying JGBs only sporadically and that is another reason the market lost steam."
Gains by US Treasuries earlier in the week and a surprise monetary tightening move by China on Wednesday had prompted speculative investors to cover short positions in JGB futures, market players said. Superlong JGBs carved out gains after Thursday's 300 billion yen ($3.3 billion) 40-year JGB auction, a re-opening of the 2.2 percent coupon No 2 paper, attracted firm demand.
The bid-to-cover ratio, a measure of demand, rose to 3.78 from 3.45 at the previous sale in November and was the highest since the May 2009 tender. "The 40-years looked attractive relative to the 30-years after the recent steepening. Investors also have to wait until May for the next 40-year sale and that appears to have draw out buyers as well," said Keiko Onogi, a senior JGB strategist at Daiwa Securities Capital Markets.
The yield spread between the 30-year and 40-year JGBs had reached a two-month high of around 8 basis points the previous day. The five-year yield climbed 2 basis points to 0.520 percent. The benchmark 10-year JGB yield rose 1 basis point to 1.335 percent after brushing a two-month high of 1.365 percent last week.
The 20-year yield declined 1 basis point to 2.125 percent, while the 30-year yield fell 2 basis points to 2.280 percent. The five-year/20-year yield spread tightened 1.5 basis points to 160.5 basis points after poking above 165 basis points to a decade high last week.