TOKYO, Aug 8: Japanese government bonds fell on Wednesday with the benchmark yield rising to a 5-week high on expectations of steps by the European Central Bank to tackle the debt crisis as well as domestic concerns about renewed political wrangling over a tax measure.
Global equities have rallied this week, sapping demand for safe-haven fixed-income assets, after the ECB indicated it could resume buying government bonds again to ease borrowing costs for debt-laden Spain and Italy. The rally continued on Wednesday, with Nikkei average ending off highs but still adding 0.9 percent.
The September 10-year JGB futures contract ended off its session low as stocks pared their gains, but still shed 0.15 points to 143.92 after earlier touching 143.75, its lowest since July 4. The December contract shed 0.42 points to 143.58.
The 10-year yield added 2 basis points to 0.795 percent after rising as 0.810 percent, its highest level since July 5.
‘My concern is that this selloff might even be magnified by profit-taking from banks, which are sitting on significant unrealized profits in bonds, so that’s a risk,’ said Le Ngoc Nhan, a strategist at Morgan Stanley MUFG.
A strong resistance level for yields lies at highs hit in March, he said, which drew Japanese life insurers into the market as significant buyers. Yields on the 10-year note rose as high as 1.060 percent that month.
‘Any knee-jerk selloff is a buying opportunity,’ Nhan added, and recommended that investors who want to hedge against further losses should buy puts instead of taking outright short positions.
The Bank of Japan began its regular two-day policy meeting on Wednesday, at which it is expected to take no new monetary steps but will stress that it remains ready to act if needed. It might also make an operational adjustment to its asset purchase programme.
PRESSURE ON NODA
In addition to the broader market backdrop, Japanese political woes also weighed heavily on bond market sentiment.
Japan’s ruling Democrats on Wednesday offered to call an election in the ‘near future’ to save their plan to hike the sales tax after opposition members demanded that Prime Minister Yoshihiko Noda commit to calling an early election in return for their backing the bill in an upper house vote.
Late on Tuesday, the ruling party delayed a final vote on the plan to deal with a no-confidence motion filed by smaller parties.
Noda must push through the plan to double Japan’s 5 percent sales tax by 2015, to reduce the country’s massive public debt and stave off downgrades to Japan’s sovereign ratings by credit rating firms.
‘The tax bill is expected to eventually pass, but with JGB yields already headed up, it’s just another reason to sell,’ said a fixed-income fund manager at a Japanese asset management firm.
The yield curve steepened as the superlong sector took the brunt of the selling, with yields on 20-year JGBs adding 2 basis points to 1.620 percent after earlier hitting 1.640 percent, their highest level since July 6.
Yields on 30-year bonds added 4 basis points to 1.850 percent, their highest since July 10.
(agencies)
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