JGBs up gingerly as stocks backpedal before US jobs

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Saturday September 04, 2010 01:29:03 AM GMT

* 10-year yield pulls away from 7-week peak

* US jobs data may add to economic optimism and weigh on debt

* But weak results could help short-covering in JGBs

* Bargain-hunting in superlongs flattens the yield curve

By Shinichi Saoshiro

TOKYO, Sept 3 (Reuters) - Japanese government bonds edged up on Friday as Tokyo stocks handed back a chunk of earlier gains on jitters over whether U.S. jobs data due later in the day will cap a week of upbeat data that has eased worries about the global economy.

The benchmark 10-year yield pulled away from a seven-week peak and the JGB curve flattened as domestic and foreign investors tip-toed out to buy superlongs after the heavy pounding they took this week.

"The market took a breather before the U.S. jobs numbers after enduring heavy selling over the week. The lull before the data provided a good chance for investors to regroup," said Koichi Ono, a senior strategist at Daiwa Securities Capital Markets.

The 10-year yield was down 0.5 basis point at 1.105 percent after touching 1.130 percent, its highest in seven weeks. The yield is still poised to rise about 11 basis points on the week, which would be the biggest weekly jump in 20 months, underscoring the battering the market has endured.

The JGB market's recent drop is part of a phenomenon of government bonds including U.S. Treasuries and German Bunds retracing previous strong rallies as this week's data suggested that pessimism towards the global economy was perhaps overdone.

Data on Thursday showed stronger-than-expected U.S. pending homes sales in July and a second week of lower initial claims for unemployment benefits, reinforcing the upbeat mood initiated by robust China and U.S. manufacturing numbers released earlier in the week.

The U.S. jobs data is expected to fortify optimism towards the economy -- therefore cutting short Friday's debt bounce.

But if weaker than forecast it could also give bonds the cement needed to strengthen the toehold they built after days of relentless selling.

The median of forecasts from economists polled by Reuters is for an overall payrolls contraction of 100,000, after employers shed 131,000 jobs in July. The forecast for private payrolls is a 41,000 increase after an increase of 71,000 in July.

As this week's JGB retreat is likely to have forced many brokerages to go short, the futures could enjoy a sizable bounce if the jobs data disappoints, traders say.

Some participants may speculate on lacklustre employment numbers and buy back futures before Friday's Tokyo session close, a dealer at a foreign securities house said.

The political situation in Japan may still prevent a huge relief rally in JGBs even in the event of disappointing data.

JGBs have sagged this week after Ichiro Ozawa, a powerbroker in Japan's ruling Democratic Party, said he would challenge Prime Minister Naoto Kan in a Sept. 14 vote for the party leadership.

The market is wary of a steepening of the curve -- which until recently had flattened partly on the fiscal austerity stance of Kan's government -- if the prime minister's post goes to Ozawa, known for his apparent propensity to spend and as a proponent of easy monetary policy.

The 20-year yield fell 1.5 basis points to 1.810 percent. It is on track to climb more than 11 basis points on the week after brushing a seven-week peak of 1.835 percent on Monday.

The five-year/20-year yield spread tightened to 151.5 basis points from a two-month high of 152.5 basis points.

September 10-year JGB futures were nearly flat, down 0.01 point at 142.20 after touching 141.98.

The Nikkei average was up 0.4 percent at midday after gaining as much as 0.9 percent. (Editing by Michael Watson)

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