JGBs erase gains on S&P warning but impact seen limited

TOKYO, April 27 Wed Apr 27, 2011 12:40am EDT

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TOKYO, April 27 (Reuters) - Japanese government bond futures edged lower on Wednesday after Standard & Poor's threatened to cut Japan's sovereign rating.

* JGBs sank to negative territory after S&P lowered Japan's sovereign rating outlook to negative, but losses were limited as market participants generally took the move in stride, saying it was inevitable considering Japan's fiscal situation.

* June 10-year JGB futures 2JGBv1 inched down 0.01 point to 139.85 after falling to 139.73. In the morning session, they hit 139.98, the highest since March 17 after climbing on U.S Treasuries. The 10-year yield rose 1 basis point to 1.225 percent after declining to a five-week low of 1.205 percent.

* "In February, Moody's warned on Japan's sovereign debt rating, so this is not news," said a trader at a U.S. brokerage.

* "People might have taken some cues from the outlook change, but moves in JGBs are very limited. We can explain them as profit taking as yields have already gone low enough to do this," he added.

* After the morning session closed, S&P lowered Japan's sovereign rating outlook to negative, but affirmed its sovereign rating at AA-. It said that damage from last month's earthquake and nuclear crisis was behind the move. It will hold a conference call on the issue at 0700 GMT.

* Takahiro Ogawa, S&P Sovereign Ratings Director said: "A lack of consensus on economic policies contributed to the change in the ratings outlook."

* "If the government spends money wisely, reconstruction spending could push up domestic demand, which could lead to an increase in revenue."

* The market has reacted calmly to sovereign rating moves in the past, largely because domestic investors hold about 95 percent of outstanding JGBs, limiting the potential impact if foreign investors flee.

* U.S. Treasury prices rose on Tuesday on expectations that the Federal Reserve will cling to a near-zero interest rate policy even as it will signal an end to its $600 billion bond programme in June.

* Players said trading activity was mostly limited to short-term players with many investors on the sidelines ahead of the Fed meeting decision and Chairman Ben Bernanke's news conference on Wednesday 1815 GMT.

* Market participants were also eyeing a series of Japan economic indicators for March to be released on Thursday.

* The Bank of Japan is expected to sharply cut its economic forecast for the current fiscal year on Thursday due to last month's devastating earthquake but project a rebound in the autumn, signalling that it has eased monetary policy enough to keep the economy afloat at least for now. [ID:nL3E7FQ0DZ] (Reporting by Akiko Takeda; Editing by Joseph Radford)

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