JGB futures hit 21-month high as stocks slide
TOKYO, Nov 9 (Reuters) - Japanese government bond futures pushed up to a 21-month peak on Friday as a further slide in Tokyo shares spurred buying of safe-haven bonds, even as investors fret that short-term yields have fallen too far. The Nikkei share average .N225 fell 1.1 percent and hit a nearly three-month low, partly on a rise in the yen as worries about the exposure of U.S. financial institutions to credit markets drove the dollar to new lows against major currencies.
But bondholders are shying away from the two- and five-year maturities, the most sensitive to policy changes, as the Bank of Japan is still expected to lift interest rates next year.
A reopening of five-year paper on Thursday with a 1.1 percent coupon drew the poorest demand in 15 months as portfolio managers look to buy longer-dated bonds for better returns until global markets start to calm, analysts said.
"Nobody really believes the BOJ's next move will be a rate cut instead of a rate hike. So it's difficult for the yield curve to steepen further," said Naomi Hasegawa, senior fixed-income strategist at Mitsubishi UFJ Securities.
Overall the market remains driven by developments in U.S. Treasuries and financial markets as investors and the BOJ try to assess the damage to the U.S. economy from the housing market debacle and the surge in subprime mortgage defaults.
"Markets are still trying to assess whether the U.S. economy is sustaining its momentum or heading to recession," said Maki Shimizu, an interest-rate strategist at UBS Securities.
December 10-year futures 2JGBv1 inched up 0.10 point to 136.69, the highest for the lead contract since late February 2006.
Futures have scaled levels last seen before the BOJ ended its extreme "quantitative easing" policy of flooding the banking system with cash in March last year, its first step towards ending zero interest rates.
The benchmark 10-year JGB yield JP10YTN=JBTC dipped 1.5 basis points to 1.520 percent, a two-month low. Two-year yields JP2YTN=JBTC were unchanged at 0.765 percent after having dropped to a nine-month low of 0.755 percent the previous day.
Reflecting some demand for longer-dated bonds, the 20-year JP20YTN=JBTC fell 1.5 basis points to 2.090 percent and 30-year yields JP30YTN=JBTC dipped a basis point to 2.335 percent.
Investors are looking ahead to next week's data on third-quarter economic growth and a BOJ policy meeting for more clues on how the shaky financial markets and U.S. economy will impact the monetary policy outlook.
Data on Thursday showed the economy's resilience to the troubles in the United States as machinery orders posted their first quarterly increase this year in the July-September period, pointing to healthy capital spending by businesses.
Even as Federal Reserve Chairman Ben Bernanke said U.S. growth was likely to remain sluggish next year, the European Central Bank kept rates on hold overnight but also vowed to keep inflation in check.
The ECB's hawkish stance on policy could help give the BOJ leeway to raise rates as long as the economy holds up.
Swap contracts on the overnight call rate show a roughly 45 percent chance of the BOJ lifting rates in March, down from near 55 percent earlier in the week, according to data from broker Meitan Tradition JPONIBOJ=TRDT. (Editing by Mike Miller)
