JGB futures fall on stock rally, position unwind
TOKYO, March 19 (Reuters) - Japanese government bond futures fell on Wednesday, pulling further away from a five-year peak struck this week as stocks rebounded on solid U.S. investment bank results that provided some relief to battered investors.
June 10-year futures 2JGBv1 dropped 0.33 point to 140.67 and tumbled as low as 140.41 at one point, well off the five-year peak of 142.00 struck in Monday's evening session.
The earnings from Goldman Sachs (GS.N) and Lehman Brothers LEH.N reassured investors that no other major investment bank appears to be on the brink of collapse like Bear Stearns BSC.N, which was absorbed by JPMorgan Chase this week to prevent the credit crisis for spreading further.
The Federal Reserve's 75-basis point rate cut to 2.25 percent was a little less than expected but also bolstered hopes that the U.S. central bank is acting aggressively to contain the damage to the financial system and economy from the housing troubles. [nFEDAHEAD]
Typically a cut in interest rates is positive for bonds, but the biggest surge in Wall Street stocks in five years spurred selling of safe-haven debt. The Nikkei share average .N225 rose 3 percent.
But highlighting the Japanese economy's uncertain outlook, the Reuters Tankan survey showed sentiment at big manufacturers falling to a four-year low in March. The index suggests the Bank of Japan's tankan survey for the March quarter will show a similarly negative result when it is released on April 1. [JP/TAN1]
Bond investors were keeping an eye on the ongoing political drama over who will succeed Bank of Japan Governor Toshihiko Fukui, whose terms ends on Wednesday. The BOJ appeared set to be in the hands of a temporary governor, with the opposition saying it will reject the government's second candidate for the post. [ID:nT55777]
Some investors were also sceptical about the latest rebound in stocks, which have rallied several times during the seven-month credit crunch only to tumble again when more bad news has cropped up.
The drop in JGBs was also limited as some investors took advantage of the move to unwind more bad positions in futures and interest rate swaps that have sparked sharp market swings and led to unusual market anomalies.
"The JGB market has seen conditions turn equally, if not more, abnormal than in overseas markets during the past week," said JGB strategists at Barclays Capital in a note to clients.
The benchmark 10-year yield JP10YTN=JBTC dipped half a basis point to 1.305 percent.
The five-year yield JP5YTN=JBTC rose 2 basis points to 0.795 percent, while the two-year yield JP2YTN=JBTC climbed a basis point to 0.580 percent.
Longer-dated bonds outperformed as players unwound bets on a steeper yield curve. The 20-year yield JP20YTN=JBTC fell 5.5 basis points to 2.080 percent and was down 14.5 basis points from Tuesday's peak.
Soured bets have forced hedge funds to buy back futures and receive fixed rates in long-term yen swaps, pushing swap rates below long-term bond yields in what is a highly unusual move. [ID:nT309726]
Swap rates are almost always higher than government bond yields due to the counterparty risk in derivative contracts.
The 20-year swap rate JPYSB6L20Y= was quoted at 2.060 percent, 2 basis points below the 20-year bond yield. At one point this week, it fell as much as 20 basis points below the JGB yield.
(Reporting by Eric Burroughs)
