Lead 10-year Japanese government bond futures rose on Friday on a flurry of short-covering, as share prices slid and the yen surged on jitters over US proposals to limit financial risk-taking. The lead March JGB futures contract touched a three-week high, with traders citing position unwinding, including the buying back of futures sold for hedging purposes.
The proposals from US President Barack Obama, which require US congressional approval, would prevent banks or financial institutions that own banks from investing in, owning or sponsoring a hedge fund or private equity fund. The rules would also bar institutions from proprietary trading.
Such proposals could hamper economic growth and are supportive for bonds, said a fund manager for a Japanese asset management firm, although others doubted that they would become law. "This could be just a temporary boost for JGBs. The US bank restriction plans had an element of surprise to them but the chances of all the proposals being approved look slim at the moment," said Shinji Nomura, chief fixed-income strategist at Nikko Cordial Securities.
Lead March 10-year JGB futures rose 0.25 point to 139.23 after hitting 139.46, their highest since the start of the month. The benchmark 10-year JGB yield fell 2 basis points to 1.320 percent.
The five-year yield dropped 1.5 basis points to 0.505 percent, while the 20-year JGB yield slipped 1 basis point to 2.125 percent. The decline by the 20-year yield was smaller than shorter dated maturities as superlong investors were still digesting the 1.1 trillion yen ($12.2 billion) of 20-year paper sold on Thursday.
Market players said some superlong buyers such as pension funds and life insurers were not in a particular rush to buy the 20-years, wanting to bargain hunt at higher yield levels. "I doubt that real money investors can make a decision to chase bonds higher, just based on what has happened yesterday and today," said a trader at a European brokerage house.
The bank restriction plans helped pushed the Nikkei stock average 2.6 percent lower and the yen up to a five-week high against the dollar and a nine-month peak versus the euro. The yen's appreciation comes ahead of a Bank of Japan policy board meeting next week.
The central bank is expected to keep interest rates at 0.1 percent and hold off on new initiatives next week, but if the yen's rise continues, it may garner attention since a strong currency can fan deflation by reducing prices of imported goods.
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