* Market players expect trading to remain in recent ranges
* Disappointment on BOJ bond buying operation hamper
* Implied volatilities at lowest in over 2 months
By Hideyuki Sano
TOKYO, July 12 Japanese government bond prices
were little changed on Friday, as disappointment over the Bank
of Japan's bond buying offer and profit-taking after gains in
the past few days nudged the 10-year yield off three-week lows.
The benchmark yield failed to break beyond a major support
at 0.800 percent, cementing expectations that sticky trading
ranges seen since late May are likely to persist as activity is
seen thinning towards the height of summer in August.
The 10-year JGB futures ended 0.04 point up at 143.16
while the 10-year cash bonds were last traded at the
yield of 0.820 percent, up 0.5 basis point from a
three-week low of 0.815 percent hit on Thursday and again
earlier on Friday.
The futures slipped after the BOJ announced its bond buying
offer, which did not include purchases in 5-10 year maturities
as some traders had hoped, though they recovered losses on
short-covering later on.
Investors also took profits as the benchmark cash bond yield
had reached near the bottom of its roughly 0.8-0.9 percent
trading range in the past several weeks.
"If you look just at economic fundamentals, the world's
industrial production looks set to keep recovering at least
until the year-end and interest rates will naturally face upward
pressure," said Tomohiro Miyasaka, fixed income analyst at
"There is downside risk in China but many investors should
be expecting a gradual rise in bond yields," he added.
Hopes of a recovery in the Japanese economy also pushed
Japanese shares to seven-week highs on Friday, discouraging
investors to buy low-yielding JGBs.
With the market hugging the same trading range for several
weeks, implied volatility of JGB options has fallen to its
lowest levels in more than two months.
The reduced volatility in itself is a positive factor for
the market, as it tends to encourage buying by investors, such
as banks, who measures their risk exposure by gauging the level
Still, many investors were unwilling to bid up beyond 0.8
percent in the 10-year yield.
Part of the reason for their reluctance is that many
Japanese regional banks and trust banks -- the group of
investors that bought JGBs soon after the Bank of Japan's
massive easing was announced on April 4 -- are likely to be
holding JGBs at a loss.
Assuming their average buying cost is about the same as the
average yield in that month, these investors on average bought
10-year bonds at around 0.6 percent, Jun Ishii, chief fixed
income strategist at Mitsubishi UFJ Morgan Stanley Securities,
said in a report.
"They are probably waiting to sell into a rally if the
10-year yield falls below 0.8 percent. Signs of such offers are
likely to be contributing to JGBs' narrow trading bands of
late," he said.
The five-year yield rose 1.0 basis point to 0.300 percent
, from Thursday's four-week low of 0.290 percent
ahead of a five-year JGB auction on Wednesday.
Japanese markets will be closed on Monday for a national