JGB futures fall after previous day's sharp gains
By Chikako Mogi
TOKYO, June 4 (Reuters) - Japanese government bond futures fell on Wednesday, a day after matching their biggest one-day gain in five years, as investors remained wary of actively buying bonds and took profits on the sharp rise.
Sentiment was also dented as Tokyo shares rose more than 1 percent and data showed Japanese firms' capital spending fell less than expected in January-March, prompting views that economic growth for the quarter could be revised higher. [ID:nT218253]
"Market players realise yesterday's gains are an overshoot, and the market's drop is natural as there is little interest for fresh buying beyond short covering," said Hiroyoshi Sandaya, fixed-income strategist at Goldman Sachs.
"The capital spending data hints at the possibility of a slight improvement in growth while inflation worries remain. It's not easy to convince players to buy," he said.
The new 293rd 10-year yield JP10YTN=JBTC rose 4 basis points to 1.780 percent, after falling to as low as 1.695 percent on Tuesday. The benchmark yield hit a 10-month high of 1.805 percent last Thursday.
The five-year yield rose 4 basis points to 1.295 percent.
The Nikkei .N225 share average rose 1.2 percent.
June 10-year JGB futures jumped 1.43 points on Tuesday as credit worries drove investors to the safety of bonds after prices had fallen sharply in the past two months. That matched the gain posted on March 17 when futures surged as the takeover of Bear Stearns underscored the severe problems plaguing the U.S. financial system.
Tuesday's sharp rise was taken as an opportunity to book profits, as traders cited a lack of buying interest even when current yield levels would normally be attractive given that the Bank of Japan is nowhere near raising interest rates.
June 10-year JGB futures ended the morning session at the day's low of 134.75 2JGBv1, down 0.60 point on the day.
"Selling in futures shows investors have regained calm after futures staged such a sharp rise despite concerns about supply," said Yasuhiro Onakado, chief economist at Daiwa SB Investments.
A key auction of 10-year JGBs on Tuesday drew weak demand as investors, battered by the recent sell-off, have reduced their JGB holdings built up when the credit crisis intensified, while fears of mounting inflation pressures have added to the bearish market sentiment.
Dealers, unable to sell bonds to investors, have also become wary of building bond inventories, leaving the market void of buyers and exposed to high volatility.
"There is no new factor to change the big picture as long as expectations for a recovery in the U.S. economy remain. JGB yields will likely stay near the upper end of the recent range. It's difficult to expect yields will fall," Onakado said.
Short covering in futures on Tuesday was driven by a report in the Wall Street Journal that Lehman Brothers LEH.N may raise $3 billion to $4 billion in fresh capital, suggesting the bank could post its first quarterly loss since going public.
U.S. Treasuries rose on Tuesday as credit market fears stoked a safe-haven bid for government debt, after players brushed aside inflation worries.
Federal Reserve Chairman Ben Bernanke took the unusual step of voicing concern about the contribution of the weak dollar to unwelcome inflation pressures, reinforcing bond investors' view that the Fed is done easing target interest rates.
Traders have said any JGB buying would likely be short-lived as players have not fully recovered from the heavy selling that had severely damaged investor portfolios.
While inflation is not as serious an issue in Japan as it is overseas, traders have kept a wary eye on the steady climb in U.S. and European bond yields.
March euroyen futures JEYv1 fell 1.5 basis points to 98.910. (Editing by Chris Gallagher)
