Japanese government bond futures dipped on Monday after better-than-expected economic data last week eased worries about the outlook for US growth, but regained some ground as a rise in Tokyo equities lost steam.
Trading was confined to a range as investors remained cautious about buying bonds aggressively given the prospect that the Bank of Japan will keep interest rates steady at 0.5 percent for a while. While the BOJ has said it is more concerned about the downside risks to growth, analysts believe that core consumer prices running at a decade-high annual rate of 1.9 percent in June leave little scope for a rate cut.
"As stocks pared earlier gains, some investors who are looking to earn coupon income bought back bonds," said Hidenori Suezawa, chief fixed-income strategist at Daiwa Securities SMBC. September 10-year futures dipped 0.06 point to 135.88, having come off a session low of 135.59. The Nikkei share average ended 0.1 percent higher after rising 1 percent earlier in the day.
The benchmark 10-year yield fell 1 basis point to 1.565 percent, edging back towards a three-month low of 1.530 percent hit earlier in July. JGBs fell initially after US Treasuries fell on Friday as data on durable goods orders, consumer sentiment and new home sales soothed some worries about growth.
"While there are worries about Japan's growth outlook, investors have few incentives to keep buying JGBs as long as there are no expectations for a BOJ rate cut," said Naomi Hasegawa, senior JGB strategist at Mitsubishi UFJ Securities.
EYES ON DATA Activity was subdued, with investors waiting to take their cues from moves in overseas stock and bond markets. Investors will also be focusing on a flurry of Japanese and US economic indicators due later in the week, including data on Japanese employment and industrial output, as well as US jobs data.
"As Japanese interest rates are expected to stay steady, the JGB market has to turn to US financial markets for clues on the direction, particularly how US markets react to the housing rescue package, and whether US yields start to climb and spur speculation of a rate hike there," said Suezawa at Daiwa Securities SMBC.
The US Congress approved a massive housing market rescue bill on Saturday, offering emergency financing to mortgage giants Fannie Mae and Freddie Mac and setting up a fund to help hundreds of thousands of troubled homeowners. President George W. Bush was expected to sign it promptly.
Another focal point will be a finance ministry auction of 1.7 trillion yen ($15.77 billion) in two-year JGBs on Tuesday. Since the BOJ is unlikely to lower interest rates, there is limited room for two-year notes to rally from current levels, said Akito Fukunaga, fixed income strategist for Credit Suisse. "It will be hard to aim for big capital gains," he said. The outlook for the auction was neutral, Fukunaga said, adding that yields in the five-year and seven-year sector probably have more room to fall than the two-year zone. The two-year JGB yield rose 1.5 basis point to 0.790 percent.