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JGBs rise, futures hit 4-mth high on growth outlook

TOKYO - Japanese government bond yields fell broadly on Thursday, pushing five-year yields to a four-month low and two-year yields to a three-month low, as economic worries and a drop in share prices lured investors into safe-haven debt.

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JGB futures eased as market players took profits after the lead contract climbed to the highest level in four months earlier in the day. Hedge selling following a tepid auction result for 10-year inflation-linked JGBs also weighed on futures.

Data earlier showed Japan's core machinery orders fell much less than expected, indicating capital spending has been barely holding, but manufacturers surveyed by the government saw orders decling in the third quarter, reinforcing the recession outlook.

JGBs have rallied over the past couple of weeks as data pointed towards a downturn in Japan's economy, bolstering market expectations that the Bank of Japan will not raise interest rates this financial year, ending next March.

In addition, concerns about global growth have also improved sentiment, as signs of economic slowdown were seen in Australia and New Zealand, with their central banks expected to lower interest rates in the coming months, traders said.

‘The level for a market floor has been raised gradually given the bleak economic outlook, making it increasingly more difficult to sell,’ said a senior dealer at a Japanese bank.

‘The scenario for global economic outlook is shifting, with a slowdown spreading, while Japan's economic deterioration means the timing of a BOJ rate hike is pushed back further,’ he said.

At the same time, players were wary of the risk of yields rising during the summer, when trading tends to get volatile in thin volume, prompting them to limit building long positions, he said.

September 10-year JGB futures ended the day session down 0.08 point to 137.11 near the day's low of 137.09, after climbing to a four-month high of 137.46 earlier. Trading volume eased to 29,913 contracts.

The 10-year JGB yield fell 1 basis point to 1.510 percent edging back towards a four-month low of 1.495 percent hit on Monday.

The five-year yield hit a four-month low of 1.020 percent at one stage, before pulling up to 1.055 percent, unchanged on the day. Two-year yields also fell to a three-month low of 0.710 percent before inching up to 0.720 percent, down 1.5 basis points on the day.

March euroyen futures rose to a four-month high of 99.200.

The Nikkei average fell 0.98 percent.

CAUGHT OFF GUARD?

The Ministry of Finance offered 500 billion yen ($4.56 billion) in 10-year inflation-linked JGBs with a 1.4 percent coupon. Bids were 2.52 times the total amount offered, sharply down from 4.07 at the previous inflation-linked JGB auction in June.

The auction was lacklustre, as falls in commodities including oil since mid-July likely curbed demand for the inflation-linked bonds, said Shinji Ebihara, a quantitative analyst at Mizuho Securities.

The fact that trading volumes have been low compared to when JGBs tumbled between early April and mid-June may be a sign that some investors were caught off-guard by the recent rally in JGBs, said Akito Fukunaga, a fixed-income strategist for Credit Suisse.

‘It suggests that JGB levels have rebounded before such players were able to rebuild positions that they had taken off earlier,’ Fukunaga said.

Daily trading volumes in JGB futures had languished below 40,000 contracts for about a month until Wednesday, when the rally in JGBs picked up steam and turnover rose to around 44,000 contracts. Liquidity also grew, with open interest topping 90,000 in the lead JGB futures contract on Wednesday for the first time since early June.