Japanese government bonds fell on Friday, hurt by dealers hedging after an auction and profit-taking by banks, as well as a rise in Tokyo shares to a seven-week closing high.
Sellers included trend-following hedge funds reacting to higher stocks, investors re-establishing short positions following a contract rollover the previous day and dealers hedging after a five-year debt sale, market players said.
"Brokerage houses have the new bonds in their inventory, and I do not think they had done a lot of hedging beforehand," said a dealer for a European brokerage house.
Such dealers probably bought the new five-year notes without hedging too much, counting on finding buyers relatively easily in light of possible further monetary easing by the BOJ, he said. June 10-year JGB futures fell 0.30 point to 138.85, after hitting a one-month low for a benchmark contract of 138.74 earlier.
The benchmark 10-year JGB yield rose 2.5 basis points to 1.340 percent, having touched a peak of 1.345 percent earlier, its highest in nearly three weeks. The five-year yield rose 1.5 basis point to 0.515 percent.
Japan's Ministry of Finance sold 2.4 trillion yen ($26.4 billion) of five-year JGBs on Thursday. Although the new paper met with firm demand in the primary market, secondary market appetite has been uneven with many buyers hesitant to buy paper they consider expensive ahead of next week's BOJ policy decision.
The central bank, under steady political pressure, is widely expected to ease policy at a March 16-17 meeting.
EYES ON BOJ MEETING:
That has underpinned JGBs over the past week but traders and analysts said such expectations may have been curtailed after talk that the BOJ might not deliver as much as some had hoped. "I think there is a little bit of disappointment related to the Bank of Japan," said a dealer at a Japanese brokerage house.
While there had initially been some talk about the possibility that the BOJ may increase its outright purchases of JGBs, such speculation has since faded, the dealer said.
The central bank may focus on doubling the lending facility introduced in December to 20 trillion yen ($220 billion) when it begins discussions on additional easing at a two-day policy board meeting starting Tuesday, the Nikkei newspaper reported. "The report may have disappointed some investors who expected the BOJ not only to increase the amount but extend the period from three months to six months as well," said RuiXue Xu, a rates strategist at RBS Securities.
Five to 10-year debt was also sold as domestic banks locked in profits before closing their books on March 31, when the domestic fiscal year ends. But there was also bargain hunting in the long-end by investors preparing for bond redemptions later this month, Xu said. Roughly 10 trillion yen ($110.4 billion) of JGBs will mature this month, suggesting there is likely to be demand for JGBs from investors looking to replace maturing bonds in their portfolios. The yield curve flattened slightly with super-long JGBs supported after solid demand at a 30-year JGB auction earlier in the week.
The five-year/20-year yield spread stood at 162 basis points, pulling back from a decade high above 167 basis points struck earlier in the week.
The 20-year yield edged up 0.5 basis point to 2.135 percent, while the 30-year yield dipped 0.5 basis point to 2.280 percent. The Nikkei gained 0.8 percent to hit a seven-week closing high, buoyed by a softer yen.
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