JGBs dip, but economy worries keep drop limited
TOKYO, March 14 (Reuters) - Japanese government bonds slipped on Friday, nudging benchmark 10-year yields up from a three-year low, as a recovery in Tokyo shares from a slide the previous day prompted some investors to book profits in safe-haven debt.
The Nikkei average .N225 rose 0.8 percent after having tumbled more than 3 percent on Thursday as the dollar's plunge below 100 yen slammed shares of exporters and stirred more worries about Japan's economic outlook. [ID:nT293927]
But the decline was limited, and investors waited to see whether the hopes of a new plan to deal with the surge in defaults on U.S. home mortgages would provide relief from the cascading financial market fallout from the subprime crisis.
Market players were now looking to see if Japan's ruling coalition and the main opposition party can come to an agreement early next week on who will succeed Bank of Japan Governor Toshihiko Fukui, who is due to retire on Wednesday. [ID:nT267031]
Analysts have said the political tussle over the BOJ has not been a major factor for investors because they do not expect a vacancy at the top of the central bank, at least not for very long, during a time of such financial market turmoil.
At the same time, investors believe that whoever takes the helm of the BOJ will do so at a time when expectations are leaning towards interest rates going down rather than up as the U.S. economy's slide filters through to Japan.
"Anyone who comes in will be much less hawkish than Fukui. The question is how dovish they will be," said Maki Shimizu, an interest rate strategist at UBS Securities.
Shimizu said the naming of the next candidates for governor and deputy governor could reinforce expectations for a rate cut, with interest rate futures showing a roughly 50 percent chance of a quarter-point cut late this year or early in 2009.
The BOJ has kept rates on hold at 0.5 percent for more than a year.
June 10-year futures 2JGBv1 dipped 0.01 point to 139.92 after reaching a peak of 140.23 the previous day, the highest since July 2005.
The benchmark 10-year yield JP10YTN=JBTC rose half a basis point to 1.295 percent after having touched a three-year low of 1.275 percent on Thursday.
The five-year JGB JP5YTN=JBTC edged up half a basis point to 0.745 percent, while the two-year yield JP2YTN=JBTC was flat at 0.560 percent.
Japan's top government spokesman said on Friday he expected concrete steps on the BOJ leadership at the start of next week.
Earlier this week the main opposition Democratic Party and its allies in parliament's upper house, where they have a majority, voted down the government's candidate, current deputy governor Toshiro Muto.
Investors were expected to keep shifting funds into the market and keep yields in a downward trajectory, but the fall in yields will likely be limited unless the market starts to see a bigger chance of a rate cut this year, market players said.
"If I have to pick, I still think the BOJ can stay on hold this year. In that case, the 10-year yield can stay near 1.3 percent, but the downside in yields is limited from here," said Naruki Nakamura, a portfolio manager who oversees 400 billion yen ($3.98 billion) of JGBs at Fischer Francis Trees & Watts.
The JGB market has been shaken this week by severe volatility in the United States as hedge funds and other investors were forced to dump mortgage assets to raise cash and meet margin calls.
The heavy sell-off in high-quality U.S. mortgages drove swap spreads sharply wider and had a knock-on effect in Japan, spurring a sharp unwinding of leveraged positions in yen interest rate swaps and securities like inflation-linked bonds.
The five-year swap spread was near 33 basis points JPYSB6L5Y=, about a basis point tighter on the day, after having swung sharply this week between a record peak near 41 basis points and a low near 30 basis points. ($1=100.52 Yen) (Editing by Michael Watson)
