Benchmark JGB yield touches three-month low in thin trade

Wed Aug 21, 2013 3:29am EDT

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By Lisa Twaronite

TOKYO, Aug 21 (Reuters) - Japanese government bonds rose on Wednesday, with the benchmark yield touching a three-month low at one point, as investors awaited the minutes of the U.S. Federal Reserve's July policy meeting for clues to the timing of U.S. stimulus reduction.

Weaker U.S. debt prices tend to weigh on JGB market sentiment, although the two debt markets have not moved in tandem recently due to diverging expectations of their respective countries' monetary policies.

The Bank of Japan has pledged to maintain its easy policy to hit its target of two percent inflation within two years, while the Fed is expected to begin reducing its stimulus as early next month.

"The decline in risk premium, I think, is the main reason behind the decline in (JGB) yield in the past month or so," said Le Ngoc Nhan, a strategist at Morgan Stanley MUFG Securities in Tokyo.

"Volatility is declining, so that means people are more comfortable going long," he said.

The yield on the benchmark 10-year JGB gave up one basis point to 0.730 percent after earlier dropping as low as 0.720 percent, its lowest since May 10. It was as high as 0.745 percent in the morning session.

Ten-year JGB futures ended up 0.13 point at 144.12, after earlier rising from a session low of 143.97 to a one-week high of 144.23. Volume of 17,936 contracts was relatively light, dropping from the previous session.

The 30-day implied volatilities on JGB futures sank to 2.88 as of Tuesday, from 3.14 on Monday. The latest data will be available later on Wednesday. Volatility is down from a two-year peak of 6.1 hit on April 12, in the wake of the BOJ's radical easing scheme unveiled on April 4.

BOJ Governor Haruhiko Kuroda said he would not hesitate to provide further monetary stimulus if downside risks from a planned sales tax hike or overseas economies increase, according to an interview in the Mainichi newspaper on Wednesday.

Earlier in the session, the 10-year yield rose to its high as a stronger yen and concerns about emerging markets helped push stocks into negative territory. The Nikkei stock average ended up 0.2 percent. The dollar also turned higher against its Japanese counterpart, erasing earlier losses to buy 97.55 yen.

"JGBs were mostly flat, but got a little lift as stocks suddenly turned lower, but moves are limited as everyone waits for fresh trading factors," said a fixed-income fund manager at a European asset management firm in Tokyo.

According to International Financing Review, a Thomson Reuters publication, a few corporate pension funds, which have been underweight JGBs, were forced to buy seven-year to 10-year notes in thin trading, as Tokyo stocks remained fragile

In recent sessions, equity markets as well as emerging markets currencies have been pressured by fears that the Fed's looming stimulus reduction will draw more capital out of Asia.

The BOJ's regular operations also lent support to the JGB market, with the central bank offering to buy outright up to 450 billion yen of JGBs with residual maturity of between five and 10 years, and an additional 200 billion yen of JGBs maturing in more than 10 years.

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