JGBs hit by Nikkei jump, yield rise may abate

Trade the News

Wednesday September 08, 2010 02:00:07 AM GMT

* Speculators unload longs in futures as Nikkei jumps 2.1 pct

* Futures slip into Ichimoku cloud for first time since April

* Bargain hunters limit rise in superlong yields

* 10-yr/30-yr yield spread tightens a bit

By Shinichi Saoshiro

TOKYO, Sept 6 (Reuters) - Japanese government bonds fell on Monday with futures dropping to a two-month low as a continuing bounce in Tokyo stocks curbed demand for debt, although bargain-hunting in superlongs suggested that the recent sharp rise in yields may begin abating.

The curve flattened a touch as yields beyond the 10-year zone rose slightly less with investors buying superlong debt such as the 20- and 30-years on price dips.

"The JGB market's retreat could continue for a few more days, with the 10-year yield rising above 1.200 percent," said a fund manager at a domestic asset management firm.

The benchmark 10-year yield climbed 5.5 basis points to 1.190 percent, after touching a 2-½ month high of 1.195 percent.

"But JGBs could start retracing the retreat towards the end of the week because the rise in Tokyo stocks appear unsustainable considering current economic fundamentals. For example, the U.S. employment data was better than expected but it still points to a slowing economy," the fund manager said.

Data released on Friday showed that U.S. employment declined less than forecast in August, adding to several indicators last week suggesting that pessimism towards the U.S. economy, and as an extension the global economy, may have been overdone. The Nikkei surged 2.1 percent helped by the data.

Bargain-hunting by investors including domestic life insurers helped curb losses in the superlongs. Market players say the zone, which sparked an extended JGB slide, could provide the impetus for a market rebound as yields may rise high enough to attract buying by real money investors sidelined by the recent volatility.

The 10-year/30-year yield spread tightened a touch to 77.5 basis points. The spread had flattened to as much as 60 basis points in mid-August, an 18-month low.

The 30-year yield climbed 4.5 basis points to 1.965 percent.

"Bonds were kept on the back foot after the U.S. jobs data. Position adjustments ahead of this month's rollover in the lead futures contracts is another factor keeping the market on a weak footing," said Naoki Tsuchiyama, a market economist at Mizuho Securities.

At about 54,000 lots, traded lots for the futures was the highest in two years.

Market players said participants rolling over long positions, which involves selling the September contracts and buying December, exacerbated the fall in the futures.

Some foreign funds also unloaded long positions in the futures, taking their cue from a surge in stock futures, they said.

Lead September 10-year futures fell 0.73 point to 141.17 after hitting a two-month low of 141.07.

Futures dipped into a cloud on the Ichimoku chart -- a bearish technical signal -- for the first time since rising above it in late April.

Popular with Japanese traders, Ichimoku charts are used to gauge a market or a security's momentum.

The 10-year yield has surged roughly 30 basis points from a seven-year trough of 0.895 percent hit less than two weeks ago.

The rise in yields has been rapid as selling by domestic banks, who had been massive buyers of superlong bonds, began booking profits for the end of the financial first half on Sept. 30.

Underlying prospects that a potential change in Japan's ruling party leadership could undermine the government's stance on fiscal austerity added fuel to the jump in yields.

The JGB market's ongoing drop is also part of a wider phenomenon among government bonds, with U.S. Treasuries and German Bunds also retracing strong rallies on the slight thaw in economic pessimism. (Editing by Michael Watson)

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