JGBs up on weak Nikkei, futures eye benchmark shift
TOKYO, Sept 9 (Reuters) - Japanese government bonds rose on Tuesday, buoyed by a fall in Tokyo share prices that bolstered demand for safe-haven government debt, as well as the previous day's rise in U.S. Treasuries.
But the lead September 10-year futures contract was nearly flat after rising by as much as 0.80 point earlier, having trimmed its gains as investors unwound long positions before an imminent benchmark shift.
Market players remained wary of volatility in the futures market, which has seen sharp swings in the last few weeks, with traders citing commodity trading advisers, or CTAs, and other hedge funds as driving such moves.
"The divergence between cash bonds and futures has been pretty pronounced over the past week," said Shinji Ebihara, a quantitative analyst for Mizuho Securities.
September 10-year JGB futures rose 0.01 point to 137.33 2JGBv1, after rising as high as 138.15 earlier.
The December contract, which is due to take over the benchmark mantle soon, rose 0.30 point to 137.80 2JGBZ8.
Investors with long positions in September futures were likely unwinding their bets and taking new long positions in the December contract, said a trader for a European investment bank.
Such position adjustments picked up steam, since December could effectively become the new benchmark as early as later on Tuesday, the trader said.
December will become the new lead futures contract when its turnover exceeds that of September, which still had more trading volume so far on Tuesday.
JGBs were supported by a 1.5 percent fall in the Nikkei share average .N225.
FIVE-YEAR AUCTION
Benchmark 10-year JGB yields fell 2 basis points to 1.505 percent JP10YTN=JBTC, pulling back from a one-month high of 1.550 percent hit on Monday.
JGBs rebounded after falling sharply on Monday, when equities soared and U.S. Treasuries slid in Asian trading in wake of the U.S. government's takeover of mortgage giants Fannie Mae and Freddie Mac.
But Treasuries later reversed their losses and ended higher on Monday, when mortgage-related accounts bought Treasuries to adjust average portfolio durations. [US/]
In the afternoon, investors will take their cues from the results of a five-year JGB auction by the Ministry of Finance. The MOF offered 1.9 trillion yen ($17.57 billion) in five-year JGBs with a coupon rate of 1.1 percent, up from 1.0 percent at a similar auction in August.
Analysts said the recent volatility in futures could make it hard for dealers to hedge their positions ahead of the auction, and that such market anomalies could lead to a weak auction result.
But given lingering concerns about the U.S. economy and market expectations for the Bank of Japan to keep interest rates unchanged for a while, some investors may see appeal in five-year JGBs, said the trader for the European investment bank.
"There has been some progress with regard to issues in the United States but U.S. economic fundamentals are weak, as can be seen from the jobs data," the trader said.
An unexpectedly steep 84,000 U.S. jobs were lost in August and the U.S. national unemployment rate hit a five-year high of 6.1 percent, data showed on Friday.
With the BOJ unlikely to raise interest rates from the current 0.50 percent within the next six months or so, some investors may decide that five-year yields near 1.1 percent to 1.2 percent are attractive, he said.
The new 75th five-year JGBs being auctioned on Tuesday were trading at around 1.1 percent on a when-issued basis, the trader added. (Editing by Chris Gallagher)
