* Ten-year JGB yield down 0.5 basis point, reversing early
* Yields on superlongs down 2-2.5 basis points on month-end
By Dominic Lau
TOKYO, June 26 Benchmark Japanese government
bond prices inched higher on Wednesday, supported by a sharp
fall in Tokyo shares on concerns over China's cash squeeze,
while longer-dated debt outperformed on the back of month-end
buying by life insurers and pension funds.
The 10-year yield edged down 0.5 basis point
to 0.860 percent after earlier rising as much as 0.885 percent
because data, including a gauge of business spending and
consumer confidence, showed the U.S. economic recovery gained
But persistent concerns over growth in China, Japan's second
biggest export market, after its central bank engineered a cash
squeeze to rein in rapid credit expansion, prompted Japanese
retail investors to dump small- and mid-cap stocks on Wednesday,
triggering further selling by hedge funds.
Japan's Mothers index, comprised of small to
mid-sized firms, slumped 11.6 percent, dragging the benchmark
Nikkei down 1 percent.
The sell-off came despite the People's Bank of China saying
late Tuesday that it had given cash to some institutions facing
temporary shortages and would continue to do so if needed, in a
bid to assure markets.
"I see higher downside risk for JGBs in the next couple of
weeks," said Akito Fukunaga, chief rates strategist at Royal
Bank of Scotland in Tokyo.
Fukunaga said JGBs had been relatively stable despite the
recent sharp rise in U.S. Treasury yields. He said the main
reason was there has been no new JGB issuance since the Fed's
policy meeting this month.
"If we look at the inter-dealer broker market, there is very
small volume ... low liquidity, just BOJ buying regularly,"
He added that JGBs would face a test when the finance
ministry sells 2.4 trillion yen ($24.6 billion) worth of 10-year
bonds next Tuesday, followed by an auction of 30-year bonds on
Ten-year JGB futures added 1 tick to 142.25, with
20,592 contracts changing hands, sharply below this year's daily
average of 30,4091 contracts.
Longer-maturities outperformed, with the 20-year yield
down 2 basis points to 1.710 percent and the
30-year yield down 2.5 basis points to 1.825
The spread between 10- and 20-year yield narrowed to 84.5
basis points after hitting a more than six-week high of 89 basis
points on Monday.
"With uncertainty surrounding the outlook for the Chinese
banking system remaining strong, we believe the 10-year sector
could come under pressure to correct ahead of next week's
10-year JGB auction," Barclays Securities wrote in a note.
"In this context, the 10-20-year sector may face flattening
pressure for now," it said.
The two-year yield added 0.5 basis point to
0.145 percent ahead of Thursday's 2.9 trillion yen debt auction
of similar maturities.