Super long JGB futures subdued, may take time to lure investors after 12-yr absence

Mon Apr 7, 2014 2:52am EDT

Related Topics

* 20-yr JGB futures trading revived for first time since 2002

* Increased super long JGB issuance behind revival

* First day of trading tepid but looks likely to attract investors over time

By Shinichi Saoshiro

TOKYO, April 7 (Reuters) - Super long 20-year Japanese government bond futures made a quiet start to trading after a 12-year hiatus, suggesting it may take some time to win over more investors and generate greater liquidity.

The futures were revived on hopes it would help investors better cope with a steady increase in issuance and any potential volatility.

At the Osaka Exchange, volume for the June 20-year futures contracts <0#JTB:> on the first day was a modest 119 lots, a fraction of the roughly 20,000 lots seen for the benchmark June 10-year futures.

Trading in 20-year JGB futures was suspended in 2002 due to low participation but the Japan Exchange Group, Osaka Exchange's holding company, announced last June that it was reintroducing them to the market.

The decision reflected the more important market role super long 20-year and 30-year JGBs have come to play.

Debt-reliant Japan plans to issue 14.4 trillion yen ($139 billion) of 20-year JGBs for the year through March 2015, up from 3.2 trillion yen 12 years ago when trade in 20-year futures was suspended.

Similarly, issuance amount of 30-years will increase to 8 trillion yen from 600 billion.

Some market players expect 20-year futures to become more popular over time.

"Trading in 20-year futures was revived at a decent time. This is because the 10-year futures have lost flexibility and as more investors are trading 20- and 30-year bonds, which make 20-year futures a handy instrument," said Tadashi Matsukawa, head of Japan fixed-income at Pinebridge Investments in Tokyo.

An increasing number of investors, such as large domestic banks, have opted to buy super long JGBs as the benchmark 10-year bonds now offer relatively little in return, with yields held low under the BOJ's massive monetary easing.

The 10-year JGB yielded 0.615 percent on Monday. In contrast the 20-year and 30-years yielded 1.475 percent and 1.665 percent.

"The key to the revival of the 20-year futures is whether investors will use it to hedge for super long auctions, for example by selling the futures while buying new 20-years," Matsukawa at Pinebridge Investments said.

The Osaka Exchange was betting on demand for 20-year futures well beyond the BOJ's quantitative easing.

"We see steady demand for interest rate futures trading as Japan continues to issue significant amounts of debt and as the BOJ eventually has to find an exit from its quantitative easing policy," said Masahiro Yada, an officer at the Osaka Exchange.

Still, doubts persisted about the merits of reviving the futures.

"Trading in 20-year futures may not pick up anytime soon. As such it could be used as a tool for speculators, which in turn could shake the cash market and end up having the opposite intended effect," said Katsutoshi Inadome, a fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.

($1 = 103.5750 Japanese Yen) (Editing by Shri Navaratnam)

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