JGBs up on Treasuries, stock rebound trims gains
By Chikako Mogi
TOKYO, Jan 31 (Reuters) - Japanese government bonds inched up on Thursday, tracking gains in U.S. Treasuries after the Federal Reserve cut interest rates, but trimmed earlier gains as Tokyo shares rebounded and eased demand for safe-haven government debt.
Treasuries rose on Wednesday after the Fed cut interest rates by an aggressive half percentage point, as expected, and suggested more rate cuts would likely be needed to support the faltering economy.
Wall Street predicts the Federal Reserve will ease monetary policy again in March but is uncertain about a rate cut beyond that, a Reuters poll showed. [FED/R]
The Nikkei share average .N225 ended the morning up 0.6 percent, after falling 1.3 percent earlier on a drop in U.S. stocks as fears about a possible downgrade of bond insurers hit the financial sector.
"The JGB market continues to take its cue from stocks, but it's mainly driven by incentives to earn quick profits from dealings rather than investment based on a clear conviction that the Bank of Japan will cut interest rates," said Naomi Hasegawa, a senior fixed-income strategist at Mitsubishi UFJ Securities.
Still, many in the market believe the BOJ will keep rates on hold for months, lending support to the market, she said.
For this reason, Hasegawa expected a two-year JGB auction on Thursday to draw fair demand regardless of the coupon level.
The Ministry of Finance offered 1.7 trillion yen ($16 billion) of two-year bonds with a 0.5 percent coupon, down from 0.7 percent at last month's auction of the maturity and matching the coupon level of the March 2006 issue.
March 10-year futures 2JGBv1 edged up 0.02 point to 137.82, after rising as high as 138.05, but still below a 28-month high of 139.15 set last week.
The benchmark 10-year bond yield JP10YTN=JBTC eased 1 basis point to 1.415 percent, but stayed well above a 28-month low of 1.310 percent hit last week.
The five-year yield JP5YTN=JBTC fell 2 basis points to 0.860 percent while the two-year yield JP2YTN=JBTC fell 2.5 basis points to 0.520 percent.
Last week, the two-year fell as far as 0.485 percent on growing expectations for a BOJ rate cut this year, below the central bank's 0.5 percent overnight rate target.
Market reaction was muted to comments from BOJ board member Kiyohiko Nishimura, who said on Thursday the central bank will undoubtedly act flexibly on monetary policy if risks to Japan's economic outlook heighten, but added the possibility of such risks being realised is low for now.
Traders said the safety appeal of government bonds will likely remain intact as long as stocks stay under pressure from troubles facing U.S. bond insurers.
MBIA Inc (MBI.N), one of the two largest bond insurers, on Wednesday said private-equity firm Warburg Pincus completed a $500 million investment in the bond insurer, in efforts to shore up its capital and avoid a credit downgrade. [ID:nN30235315]
The pressure on bond insurers mounted on Wednesday after Fitch Ratings downgraded fourth-largest bond insurer FGIC Corp's credit ratings and Standard & Poor's reviewed the ratings on $529 billion worth of U.S. mortgage-backed securities and collateralised debt obligations. [ID:nN30703003]
If these bond insurance firms lose their top ratings, which are crucial to their business of guaranteeing securities tied to municipalities and consumer debt, financial firms that bought this insurance are likely to suffer another wave of potential losses on mortgage investments while other investors may be forced to sell insured debt. ($1=106.23 Yen)
