JGBs recover to trade higher after 10-year auction

Tue Jul 3, 2012 2:42am EDT

Related Topics

* Demand robust for 10-yr auction despite low coupon

* JGB 10-yr futures, prices pare losses

* Investors should seek chance to buy on weakness - analyst

By Dominic Lau

TOKYO, July 3 (Reuters) - Japan's 10-year government bond futures and prices recovered early losses to trade higher o n Tuesday after demand was robust for a debt auction of similar maturity despite the lowest coupon rate in nine years.

Many market players had previously expected demand for the 2.3 trillion yen ($29 billion) worth of 10-year bonds to be just fair as they offered a coupon of 0.8 percent, the lowest since 2003.

However, the solid demand, with a bid-to-cover ratio of 3.10, up from the previous auction's 2.95, prompted investors to cover their bearish bets.

"It came out stronger-than-expected ... The strong auction result is showing you that investors are under invested. Investors are looking to pick up on dips in the market despite the fact that equities and other risk markets are strong," said Le Ngoc Nhan, a strategist at Morgan Stanley MUFG.

The 10-year JGB futures ticked up 0.05 point to 143.82 after trading as low as 143.63 before the auction results. Tuesday's gain took the futures to above their five-day moving average.

The yield on 10-year cash bond pared gains to trade down 1.5 basis points at 0.810 percent after the auction, while that of longer-dated 30-year bond also attracted buying interest, down 1 basis point to 1.850 percent.

Nhan said JGB yields would continue to be a function of risk condition driven mainly by the euro zone crisis. Further improvements in Europe "could see higher yield which is something I expect in the near-term," he said.

Credit Suisse also said it did not expect to see any repeat of sharp risk-off moves as in the last quarter but a substantial rise in yields was also unlikely.

"Although a substantial rise in yields looks unlikely, we think a rise in yields to the extent of reversing the declines that have been recorded thus far is quite possible," it said in a note.

"We see no reason to aggressively chase higher prices, and think it best to hold back to maintain the ability to buy on weakness when yields are rising," Credit Suisse added.

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