JGBs gain on relief after 30-year auction, weak Tokyo stocks

Thu Jun 6, 2013 3:21am EDT

Related Topics

* 30-year auction tepid, not as bad as some had feared

* Investors awaited auction for bargain-hunting opportunities

* Nikkei on verge of bear market

* Falling market volatility seen drawing back investors

By Hideyuki Sano

TOKYO, June 6 (Reuters) - Japanese government bond prices gained on Thursday as bargain-hunting emerged after some anxiety over how a 30-year bond auction would fare and as Tokyo stocks buckled, dropping to a two-month low.

Some market players expect further gains in JGBs as volatility appears to be easing after spiking in the past couple of months, which could prompt investors to be less wary about bond investments.

The latest move comes as concerns that the U.S. Federal Reserve may reduce its stimulus rattles global equity markets, benefiting bonds including JGBs, with Friday's U.S. jobs data seen as having potential to cement such concerns.

The benchmark June 10-year JGB futures price rose 0.24 point to 143.02, after a choppy session, in which bond futures mostly moved in the opposite direction to volatile Tokyo shares.

A break of Monday's high of 143.23 could open the way for a test of 143.56, a 50 percent retracement of the contract's fall from a record peak in early April to a two-year low hit in late May.

The Nikkei share average fell 0.9 percent to a two-month low and was on the verge of being considered to be in bear market territory, which is often defined as a 20 percent decline from a recent peak.

JGBs also extended gains on relief that the results of a 600 billion yen ($6 billion), 30-year JGB auction, turned out to be tepid, but was not as disastrous as some had feared.

"The results were hardly impressive but the market had had very low expectations, going into the auction. So there was no surprise," said Keiko Onogi, senior JGB strategist at Daiwa Securities.

"There seems to be buying from investors who were looking to scoop up the 30-year bonds after weak auction results," she added.

The auction's tail -- the gap between lowest and average price -- was 0.32, above the average of 0.219 in the last 10 auctions and the second worst in the past few years after a record 1.16 set in April.

The off-the-run 38th 30-year bond yield fell 0.5 basis point to 1.820 percent,

Shorter maturities fared better, with the current 10-year yield dipping 2.0 basis points to 0.835 percent.

Although the BOJ's massive easing in April drove up the 10-year yield to a 13-month high of one percent last month, buyers were coming back as Japanese stocks lost momentum.

With the 10-year yield mostly stuck in 0.8-0.9 percent range in the past few weeks, there is a growing sense that JGBs, which had been battered after the Bank of Japan announced an aggressive stimulus programme in April, are finally regaining some stability.

"As market volatility is gradually falling, JGBs will be bought back from an oversold position. The 10-year is likely to fall below 0.8 percent," said Le Ngoc Nhan, strategist at Morgan Stanley.

"There's a rumour that the BOJ may introduce a long-term liquidity funding operation. It may not do so in the next policy meeting, but such speculation could drive down short-term bond yields. So I expect the market to continue to bull-steepen," Nhan added.

The BOJ's next policy meeting is scheduled for June 10-11.

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