TOKYO, Aug 7: Japanese government bonds sagged across the curve on Tuesday, as risk appetite perked up on hopes that the European Central Bank will take more steps to address the euro zone’s debt crisis.
Decent demand at a 40-year sale failed to kindle any bargain-hunting, with benchmark yields rising to their session highs in the afternoon session as stocks extended gains after Spain and Italy’s borrowing costs fell overnight. The Nikkei average climbed 0.9 percent.
‘The auction was slightly better than expected,’ said Keiko Onogi, senior JGB strategist at Daiwa Securities. ‘but the 40-year sector is on the edge of the yield curve, and the size of the sale is very small,’ she added.
Japan’s Ministry of Finance sold 40-year bonds at a lowest accepted price of 99.05 to yield 2.035 percent. The bid-to-cover ratio was 3.48, down from 3.99 at the previous tender in May.
The September 10-year JGB futures contract ended down 0.37 points at a one-week low of 144.07, just a tick above its session low and back below futures’ 14-day moving average, now at 144.36, after closing above it for two sessions.
Futures trading was halted for much of the morning due to an apparent system problem at the Tokyo Stock Exchange, which said it was investigating the issue.
Despite the closure, more than 31,500 contracts changed hands, up from Monday’s 21,717 but down from last week’s average of 33,181.
The 10-year yield added 3.5 basis points to 0.770 percent after rising as high as 0.775 percent, moving away from a nine-year low of 0.720 percent hit last month.
POLITICS MAKING INVESTORS NERVOUS
Japan’s ruling Democrats agreed with opposition rivals to hold a final vote on their tax hike plan on Wednesday. The plan to double the sales tax to 10 percent by 2015 already cleared the lower house in June after the Democrats and two main opposition parties reached a deal.
‘The prospect of either a delay in the passage of consumption tax legislation or an election as early as this autumn is making JGB investors nervous this week,’ said Neale Vincent, a strategist at Nomura Securities.
‘Most investors assume that if it doesn’t pass this year, it will next year. I think the more worrying aspect for the market is what (Prime Minister Yoshihiko) Noda might have to agree to for it to get through,’ he said, including factors such as the timing of the election timing, and how the money is spent.
Also on investors’ radar is the Bank of Japan’s regular two-day policy meeting beginning on Wednesday, at which it is expected to keep monetary policy steady but emphasise it remains ready to take stimulus steps if needed. It might make some technical tweaks to its asset purchase programme, and could scrap the minimum bidding yield for JGB purchases.
Such expectations have underpinned the shorter end of the yield curve, leading to steepening. At its last policy meeting in July, the bank abandoned the minimum 0.1 percent bidding yield to buy discount bills and commercial paper under the asset purchase programme.
Yields on 20-year JGBs rose 3.5 basis points to 1.600 percent, while those on 30-year bonds also added 3.5 basis points to 1.815 percent. ($1 = 78.263 Japanese yen)
(agencies)
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