JGBs rally on U.S. Treasuries after Fed, more cuts seen
TOKYO, Dec 12 (Reuters) - Japanese government bonds jumped on Wednesday, boosted by a surge in U.S. Treasuries on the view that the Federal Reserve's 25 basis point interest rate cut may not be enough to stem the impact of credit problems on the U.S. economy.
Treasuries posted their biggest rally in more than three years on Tuesday as investors dumped U.S. stocks for safer government debt after the cut in the fed funds rate to 4.25 percent surprised some investors who had been hoping for a 50 basis point cut.
"JGBs are up because Treasuries rose on the view that the Fed's move leaves the door open for more rate cuts in the future," said Naomi Hasegawa, senior JGB strategist at Mitsubishi UFJ Securities.
"Also, U.S. stocks fell, so what we had was a 'sell-the-fact' situation in equities," she said, adding that many in the market had been anticipating only a 25 basis point rate cut.
A Reuters poll taken after the Fed's announcement shows that 15 out of 18 U.S. primary dealers see the central bank cutting rates next month. [nNAT003508]
Investors offered limited reaction to data showing that Japan's corporate goods price index rose 2.3 percent in November from a year ago, its fastest pace in more than a year, as it did little to change the market's view that Japanese interest rates are unlikely to rise until later next year.
March futures 2JGBc1 jumped as much as 0.84 point to the day's high of 136.78 at the open, reversing a fall to a one-month low on Tuesday. Futures had hit a 22-month high of 137.73 earlier in the month.
The March contract, which took over as the lead contract on Tuesday, ended the morning up 0.79 point at 136.73, also boosted by a 1.84 percent fall in the Nikkei stocks average .N225.
The yield on the benchmark 10-year JGB JP10YTN=JBTC tumbled as much as six basis points to 1.520 percent, peeling away from a one-month high of 1.585 percent hit on Tuesday.
Short- to mid-term maturities also rallied. The five-year yield JP5YTN=JBTC dropped as much as seven basis points to 1.030 percent, while the two-year yield JP2YTN=JBTC fell four basis points to 0.695 percent, its lowest since October 2006.
Analysts said that gains in Treasuries on the Fed cut may have been overdone, but ongoing concerns about whether the U.S. economy will be able to buck liquidity problems would keep bond markets supported, and that JGBs may extend Wednesday's climb.
"Increasingly, investors are becoming more pessimistic on the economy," said Freddy Lim, JGB strategist at Morgan Stanley in Tokyo, adding that investors remain worried about growth in Japanese exports, along with consumption and wages.
"So I think it's more of a bullish market for JGBs," he said, adding that the 10-year yield may soon fall to 1.45 percent, particularly if the BOJ's tankan survey of business sentiment due on Friday shows that firms are less optimistic about the economy.
But he added that, barring any fresh factors to pick up bonds, the 10-year yield was unlikely to revisit a 26-month low of 1.395 percent hit last month.
Explaining the rate cut, the Fed said financial strains had increased in recent weeks but some inflation risks remained. Some investors had been expecting the Fed to put more emphasis on concerns about weakening economic growth. Continued...
