JGB futures erase gains on data after short-covering
TOKYO, May 16 (Reuters) - Japanese government bond futures edged down towards a seven-month low on Friday, erasing earlier gains as strong growth data discouraged market players from continuing to cover short positions after this week's plunge.
JGBs initially drew support from the previous day's gains in Treasuries and a better-than-expected five-year debt auction that soothed some fears about poor investor demand after the market sell-off over the past two months.
But with many market players badly burnt by the bond slump since the start of Japan's new financial year in April, a recovery in JGBs looked fragile without a powerful buyer, analysts and traders said.
"It is dangerous to buy bonds in the current market," said a trader at a big Japanese bank.
"Given the recent high volatility in the market, the risk that market players can take in their bond holdings has decreased and such conditions may not improve much for a while," he said.
June 10-year JGB futures edged down 0.03 point to 135.12 2JGBv1, giving up earlier gains to 135.58 and falling back towards a seven-month low of 134.28 hit earlier this week.
On Wednesday, the lead contract had tumbled nearly two full points at one stage in a near repeat of a sell-off late last month when futures posted their biggest one-day loss in five years.
Japan's economy grew 0.8 percent in January-March from the previous quarter, beating market expectations for a 0.6 percent increase, Friday's data showed. [ID:nTKU003275]
The benchmark 10-year yield was flat at 1.670 percent JP10YTN=JBTC after falling as low as 1.650 percent early in the session and pulling further away from a seven-month peak of 1.705 percent first struck on Wednesday.
The yield of the new five-year note auctioned the previous day fell a basis point to 1.250 percent JP5YTN=JBTC and touched as low as 1.230 percent, staying below a nine-month high of 1.320 percent hit on Wednesday.
Traders said investors crawled back to pick up the midterm sector, after Thursday's five-year auction demonstrated some demand for the new issue with a 1.3 percent coupon, which was the highest since the October issue.
BOJ RATE VIEW
Gains in share prices and growing expectations that the Bank of Japan's next interest rate move will be upward also kept a lid on any rises in JGBs, traders said.
The short-term sector, the most sensitive to changes in the monetary policy outlook, remained vulnerable as more investors believe the BOJ could eventually boost interest rates from the current 0.5 percent on perceptions that the worst of the credit market turmoil may be over.
Many investors are now mulling a possible U.S. Federal Reserve interest rate rise later this year. Continued...
