JGBs dip, short-term yields edge up from 2-year low
TOKYO, Jan 15 (Reuters) - Japanese government bonds dipped slightly on Tuesday, lifting short-term yields from two-year lows as slight gains in Tokyo stocks prompted some market players to take profits on the surge in safe-haven debt.
The Nikkei share average .N225 climbed 0.5 percent, but the rebound was limited following a rally of more than 1 percent on Wall Street on Monday.
Selling also picked up in the morning session as bond dealers made room on their books before an auction of five-year notes the next day. The Ministry of Finance will sell about 2.0 trillion yen ($18.5 billion) of the maturity. March 10-year futures 2JGBv1 retreated 0.21 point to 137.80, backing off a two-year peak of 138.27 struck on Friday.
The yield on benchmark 10-year notes JP10YTN=JBTC edged up 1.5 basis points to 1.435 percent.
The five-year yield JP5YTN=JBTC rose 1.5 basis points to 0.900 percent, up from a two-year low of 0.860 percent.
JGBs jumped last week as worries mounted that Japan could suffer an economic recession this year along with the United States, forcing the Bank of Japan to consider cutting rates from the current 0.5 percent.
Swap contracts on the overnight call rate JPONIBOJ=TRDT are pricing in a roughly 20 percent chance of a BOJ rate cut in the middle of the year, swinging sharply last week after having previously reflected a small chance of a rate hike.
The two-year yield JP2YTN=JBTC inched up a basis point to 0.615 percent after having slid to 0.580 percent on Friday -- just 8 basis points above the BOJ's target for overnight rates and highlighting the shift in sentiment.
But BOJ officials have stuck to their stance that interest rates need to rise, even while acknowledging the mounting risks to the global economic outlook. Most investors believe the BOJ will keep rates on hold unless conditions deteriorate sharply.
Kenro Kawano, an interest rate strategist at Credit Suisse, said BOJ officials tend to move gradually in changing their policy outlook.
"Since 2005, the market has tried to imply future rate hikes. If the opposite happens, the reaction should be quite big," Kawano said. "Trying to imply that kind of a scenario means the market will bullish steepen further."
The spread between five- and 20-year yields shrank 1.5 basis points to 118 basis points after having pushed out to 121 basis points on Friday, the curve's steepest level since December 2005. BOJ Governor Toshihiko Fukui told the central bank's regional branch managers on Monday that Japan's pace of growth is slowing because of a housing slump that has resulted from tighter building regulations but that the economy remains on a moderate expansion trend.
Investors will scour the BOJ's report on the performance of Japan's regional economies later in the day, which may highlight the troubles in the areas outside the urban centres.
In December the BOJ downgraded its economic view for the first time in three years to say growth is slowing. The BOJ holds a two-day policy meeting ending on Tuesday next week.
Market players are also awaiting Citigroup's (C.N) quarterly earnings report later in the day to see the size of its asset write-downs from the credit crunch and what steps the largest U.S. bank is taking to shore up its depleted capital.
Several other banks and U.S. companies report earnings this week, including Merrill Lynch MER.N and JPMorgan Chase (JPM.N).
