JGBs skid as stocks soar after U.S. jobs paint brighter picture

Tue May 7, 2013 3:06am EDT

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* 0.6 percent is dip-buying level for 10-yr JGBs: strategist
    * 20-year JGB futures trade could resume from April 2014

    By Lisa Twaronite
    TOKYO, May 7 (Reuters) - Japanese government bond prices
slipped on Tuesday as investors caught up after a long holiday
weekend and digested an upbeat U.S. employment report that
dimmed the appeal of safe-haven fixed-income assets.
    On May 2, the last trading day before a four-day long
holiday weekend here, the benchmark 10-year yield had skidded to
a nearly two-week low, bolstered by the Bank of Japan's
asset-buying operations. The central bank did not announce any
new operations on Tuesday.    
    The 10-year yield rose 3 basis points to
0.585 percent after rising as high as 0.590 percent. It headed
away from its Thursday close of 0.555 percent, which was its
lowest level touched since April 19. 
    "Before the holiday, bond sentiment was strong, but that was
before Friday's U.S. employment report. Some long positions were
built up, and they're now being taken off," said a fixed-income
fund manager at a Japanese trust bank in Tokyo. 
    The Nikkei stock average ended up 3.6 percent to
break above 14,000 for the first time since June 2008, as the
market caught up after the extended holiday and reacted to last
the U.S. jobs data.

  
    
    "There are big cross-currents in the market, where you have
the BOJ buying a huge amount of bonds but economic expectations
are picking up," said Neale Vincent, strategist at Nomura
Securities in Tokyo. 
    For every 10 trillion yen of JGBs the BOJ buys under its
massive quantitative easing scheme, yields dip roughly 4 or 5
basis points, he estimated, suggesting the central bank's whole
asset-buying stimulus program through the end of 2014 could push
yields as much as 70 basis points lower than where they
otherwise might be. 
    "If the government is right and the economy improves to
around 3 percent nominal growth by the end of 2014, fair value
for 10-year JGBs, without the supply-demand impact of QE, would
be somewhere around 2 percent," he added.     
    The 10-year futures contract finished down 0.39
point at 144.73, moving away from Thursday's intraday high of
145.15, which had been its highest peak since April 8.
    "Supply and demand continues to reflect BOJ buying
operations, as confirmed by last week's 10-year JGB auction. In
short, we believe it remains difficult to sell at 10-year yields
of 0.6 percent with the effective decrease in supply," said
Chotaro Morita, chief rates strategist at Barclays Securities
Japan. 
    Many investors will probably continue to view 0.6 percent as
a dip-buying level for 10-year JGBs, he said in a note to
clients on Tuesday.      
    Japan's finance ministry has no auctions of new or reopened
issues scheduled this week. On Wednesday, it will conduct a
liquidity-enhancement auction for old 20- and 30-year bonds.    
    The superlong tenor underperformed, with the 20-year JGB
yield adding 3.5 basis points to 1.485 percent,
while the 30-year yield rose 3.5 basis points to
1.615 percent.
    Over the long holiday weekend, Japan Exchange Group Inc.
said it will resume trading of 20-yr JGB futures from around
April 2014, after halting trade in 2002 due to inactivity.
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