JGBs fall, market focuses on tankan's bright spots
By Naomi Tajitsu
TOKYO, Dec 14 (Reuters) - Japanese government bonds fell on Friday after a Bank of Japan business survey showed that capital spending strengthened even as problems in the U.S. subprime mortgage market cloud the economic outlook.
The central bank's quarterly tankan poll showed that big manufacturers expect spending to rise a higher-than-expected 10.5 percent this fiscal year, up from 8.7 percent in the September poll.
Smaller companies were more optimistic about the economy even as sentiment at large manufacturers hit a two-year low, the poll showed.
"The outlook isn't that strong, but it offers some assurance that sentiment has not decreased as much as some had feared," said Hitomi Kimura, a fixed income strategist at J.P. Morgan Securities.
March futures 2JGBv1 ended the morning session 0.39 point lower at 136.35, pressured by a 0.6 percent climb in the Nikkei share average .N225 by midday.
The yield on the benchmark 10-yr JGB JP10YTN=JBTC rose 3.5 basis points to 1.545 percent, edging closer to 1.585 percent hit on Tuesday, its highest since early November.
The two-year yield JP2YTN=JBTC was unchanged at 0.735 percent, keeping its distance from a 14-month low of 0.695 percent hit earlier in the week.
The five-year yield JP5YTN=JBTC rose 2.5 basis points to 1.070 percent, closing in on a one-month high of 1.090 percent hit on Monday.
The headline index for the BOJ's quarterly tankan poll for big manufacturers came in at plus 19, lower than expectations for plus 21 and the weakest since September 2005, but the index for small firms was plus 2, stronger than forecasts for minus 2.
Friday's figures did little to change market expectations that the BOJ will have a hard time raising interest rates from 0.5 percent until well into 2008, analysts said.
TRACKING TREASURIES
JGBs also came under selling pressure after U.S. Treasuries fell on Thursday, when a surprising surge in U.S. producer prices and solid retail sales in November raised the possibility that the Federal Reserve may not continue to cut U.S. interest rates as aggressively as initially expected.
"The influence of Treasuries has been strong in the past six months, and the correlation between JGBs and Treasuries has been high," said Stefan Liiceanu, a JGB strategist at Barclays Capital.
He added that demand for JGBs has cooled in part as the benchmark 10-year Treasury yield has jumped as much as 25 basis points in choppy trade this week.
Treasury yields jumped after a coordinated announcement by the Fed and other central banks on Wednesday to inject more funds into struggling credit markets to prompt more lending between banks, which has been frozen in the past few months.
The move followed the Fed's decision to cut its benchmark fed funds rate by 25 basis points by 4.25 percent on Tuesday, which had sparked a rally as it had surprised some investors who had been eyeing a 50-basis-point cut to offset the overall economic impact of credit problems.
The credit crunch triggered by a meltdown in the subprime mortgage market has supported bond markets in the past few months as shrinking risk demand has prompted safe-haven buying in government debt.
Such problems were highlighted again on Friday, when ratings agency Moody's lowered its rating for Citigroup (C.N), the No. 1 U.S. bank, which has taken massive write-downs for mortgage-related holdings.
While financial institutions like Citigroup continue to suffer from credit woes, Goldman Sachs Group (GS.N) was expected to report a record net annual income of more than $11 billion, the Wall Street Journal reported on its Web site on Thursday. (Editing by Mike Miller)
