JGBs tumble further with Treasuries after Fed cut
TOKYO, Sept 21 (Reuters) - Japanese government bond futures tumbled to a five-week low on Friday, tracking this week's sell-off in U.S. Treasuries after the Federal Reserve's aggressive half-point interest rate cut fanned worries about inflation.
Long-term Treasury yields have soared as the Fed's rate slash, combined with a surge in oil prices to record peaks and the dollar's tumble to a record low against the euro, has stirred fears that inflation will accelerate in the United States.
"This is mainly because of the reaction to the Fed rate cut," said Kenro Kawano, an interest-rate strategist at Credit Suisse. "The rise in inflation expectations is a global one. It's not good news for long-term yields." Analysts said the slide in JGBs may be exacerbated as domestic investors become reluctant to step into the market while preparing to close their books on the first half of Japan's financial year at the end of the month.
But Kawano at Credit Suisse said some domestic investors were likely downgrading their forecasts for growth in Japan and the United States and would be looking to buy bonds closer to the start of the second half of the fiscal year.
JGBs have been at the mercy of the moves in Treasuries as investors and the Bank of Japan look for signs of how much the credit market crunch will hurt U.S. growth and have a knock-on impact on the domestic economy.
December 10-year futures 2JGBv1 plunged 0.72 point to 134.58 and fell as far as 134.44, the lowest since mid-August.
The benchmark 10-year yield JP10YTN=JBTC jumped 6.5 basis points to 1.690 percent, up 15 basis points on the week, and reached a five-week high of 1.7000 percent.
Twenty-year bond yields JP20YTN=JBTC climbed 5 basis points to 2.210 percent, while five-year yields JP5YTN=JBTC surged 7.5 basis points to 1.225 percent.
Two-year yields JP2YTN=JBTC rose 3.5 basis points to 0.840 percent, lagging the spike in long-term rates as the yield curve steepened further.
The spread between two- and 20-year yields widened another 3 basis points to 85 basis points, the most in two months.
The market was also smarting in the wake of a weak auction of 20-year bonds on Thursday that left dealers saddled with more of the issue than they had wanted.
Some analysts said foreign investors were likely needing to sell JGBs after having been huge buyers of yen bonds in August when the money market strains in the United States and Europe sparked a flight to safe-haven government bonds.
Data on Thursday from the Japan Securities Dealers Association showed foreign investors bought a record 3.8370 trillion yen ($33.1 billion) of bonds in August, even as Japanese city banks, insurers and agricultural institutions were net sellers. [ID:nnT211507]
JAPAN INFLATION RISE?
Market players said the surge in commodity prices could lead to a pick-up in price pressures in Japan as well, with core consumer prices having been stuck near zero for much of the past year.
"The global bond market is reacting to the decision of the Fed," said Naruki Nakamura, a portfolio manager who oversees 400 billion yen ($3.5 billion) of JGBs at Fischer Francis Trees & Watts in Tokyo.
"Japanese inflation is partly influenced by commodity prices. It will be affected," Nakamura said.
U.S. crude oil prices dipped in Asia but held near the all-time peak of $84.10 a barrel CLc1 hit the previous day, while the Tokyo Commodity Exchange's index of commodity prices .TOCOM has surged 12 percent in the past month.
Reflecting the risk of higher inflation, the spread between yields on regular 10-year JGBs and that on inflation-indexed JGBs swelled to 39 basis points on Friday and has widened by 7 basis points in the past three days.
