JGB futures jump on gains in Treasuries, Nikkei drop
TOKYO, May 21 (Reuters) - Japanese government bond futures climbed on Wednesday, boosted by gains in U.S. Treasuries and after Tokyo shares dropped on deepening concern about the impact of the slowing U.S. economy as oil prices hit record highs near $130 a barrel.
JGB futures extended their rebound from a seven-month low hit last week as investors became fearful that soaring oil prices would hit corporate profits and heighten downside risks to the domestic economy, undermining firm exports.
Bank of Japan Governor Masaaki Shirakawa said on Tuesday that Japan's economic slowdown was becoming more evident, noting uncertainty over the global economy and soaring energy and raw material costs.[ID:nT37919]
Shirakawa's remarks matched expectations that the central bank will sit tight for some months before eventually raising rates.
On Tuesday, the BOJ left interest rates unchanged at 0.5 percent, as widely expected, by a unanimous vote.
"The theme of the market could shift back to the economic slowdown and credit crunch," Eiji Dohke, chief JGB strategist at UBS Securities, said in a note to clients.
June 10-year futures 2JGBv1 rose 0.47 point to 135.94 after jumping as high as 136.09 earlier in the session. The lead contract pulled further away from a seven-month low of 134.28 hit last week.
Gains in JGBs could be limited, however, as many market players are still licking their wounds after weeks of severe volatility that have burnt investors ranging from big Japanese banks to hedge funds, prompting them to sell bad bets on any rise, traders said.
In the past two months, global equity markets have rebounded and government bonds have taken a hit on growing views that the worst of the credit crisis has passed.
The benchmark 10-year yield JP10YTN=JBTC dipped 3.5 basis points to 1.605 percent and touched as low as 1.600 percent, well off a seven-month high of 1.710 percent hit on Friday.
The five-year yield JP5YTN=JBTC fell 4 basis points to 1.165 percent, sinking further from a nine-month high of 1.320 percent struck a week ago.
The two-year yield JP2YTN=JBTC slid 3 basis points to 0.780 percent, while the 20-year yield edged down 2.5 basis points to 2.220 percent JP20YTN=JBTC.
The market is awaiting the results of the Ministry of Finance's 600 billion yen ($5.8 billion) sale of 15-year floating-rate JGBs, due at 0345 GMT.
The bonds are being offered at a 20 basis point discount from the base rate. The base rate for the initial coupon payment is 1.67 percent.
Analysts said the relatively high initial coupon after the discount might draw some demand from investors who were looking to replace holdings of previously issued 15-year floaters that had lower initial coupons.
And a 100 billion yen reduction in the offer from the last auction in February could help the auction go smoothly, analysts said.
But hopes for strong buying dimmed after investors dumped holdings of floating-rate JGBs during the recent market sell-off to cut losses, they added.
"The auction may not impact the overall market much as sluggish demand for 15-year floaters is already expected," said Katsutoshi Inadome, a fixed-income strategist at Mitsubishi UFJ Securities.
The Nikkei share average .N225 was down 2 percent at a one-week low by the midday break.
U.S. crude oil futures CLc1 held steady around $129 a barrel on Wednesday, after hitting a record $129.60 on Tuesday. [ID:nT121913] ($1=103.62 Yen) (Editing by Chris Gallagher)
