JGBs down on Nikkei bounce well-received

Japanese government bond futures slipped further on Tuesday from a one-month peak hit last week, as stocks rose and U.S. Treasuries fell after better than expected U.S. manufacturing data.

Futures, however, trimmed some losses after a well-received 10-year debt auction brought some relief to the market by showing that investors were willing to tip toe down the curve in search of higher yields.

The bid-to-cover ratio, a gauge of demand, rose to 3.62 in the auction of 2.2 trillion yen ($24 billion) of 10-year bonds with a 1.3 percent coupon. It was the highest ratio reading since the May 2007 tender.

“The auction went quite smoothly. One reason for the good results is that 10-year notes looked cheap compared to other maturities, attracting demand from investors such as actively managed pension funds.” Market players said demand also came from some domestic banks looking for higher returns, with yields of short to midterm JGBs, their traditional domains, pinned down near four-year lows.

“The second supportive factor is the weakness in the JGB market in the past two days that had pushed up the benchmark 10-year yield to the 1.350 percent level where many people were hoping to buy,” Inadome at Mitsubishi UFJ Securities said.

The 10-year yield climbed 1.5 basis points to 1.345 percent after hitting 1.350 percent, its highest in three weeks.

The market was little affected by reported comments from banking minister Shizuka Kamei, who said Japan Post should buy more corporate bonds and U.S. Treasuries.

Banking minister Kamei told the Financial Times in an interview that ran on Tuesday the government-owned financial conglomerate Japan Post should invest more in corporate bonds and U.S. Treasuries, rather than Japanese government bonds.

Many analysts doubt Japan Post, which holds more than three-quarters of its total assets of about 300 trillion yen ($3.3 trillion) in JGBs, can sharply cut its JGB holdings because of concern that its selling could destabilise the market.

They also say the bank, despite its size, has few financial experts to make more active investments any time soon.

Although Japan Post has attempted to expand its lending since the government began a 10-year privatisation process in 2007, the effort fell through and its government bond buying has increased.

March futures slid 0.29 point to 139.11, pulling back from a one-month high of 139.71 reached last week. Tokyo’s Nikkei average was up 1.4 percent, boosted by a rally on Wall Street the previous day.

Reuters