August 1, 2019 / 6:42 AM / 3 months ago

JGBs post biggest daily fall in year as Fed dampens rate-cut bets

(Updates with benchmark futures milestone, details)

* JGBs slip after Fed’s Powell denies start of easing cycle

* Yen’s fall seen as reducing chance of BOJ easing

* Super-long JGBs outperform after month-end buying

* FF futures price in 60% chance of Sept Fed rate cut

By Hideyuki Sano

TOKYO, Aug 1 (Reuters) - Japanese government bond prices sagged on Thursday, with the benchmark futures marking their biggest daily fall in a year, after the U.S. Federal Reserve chief dampened expectations of more monetary easing after it cut rates by 25 basis points.

The yen’s fall to two-month low after the U.S. Fed is seen as reducing pressure on the Bank of Japan to ease its policy to keep up with other central banks, helping to lift short-term JGB yields.

“The yen’s weakening during Tokyo trade appears to have quite a lot of impact,” said Yusuke Ikawa, Japan strategist, BNP Paribas.

Benchmark 10-year JGB futures fell 0.26 point to 153.54, extending losses after an auction of 2.1 trillion yen 10-year JGBs produced weak results.

It was the largest fall since Aug. 1 last year, when the benchmark futures fell 0.83 point following the Bank of Japan’s decision to make its 10-year bond yield target more flexible by allowing moves of up to 20 basis points from zero percent.

The 10-year cash JGB yield rose 2.5 basis points to minus 0.135 percent.

The five-year JGB yield rose 2 basis points to a two-week high of minus 0.225%, while the two-year JGB yield rose 2 basis points to minus 0.190%.

Weakness in shorter maturities reflected receding expectations of a rate cut by the Bank of Japan. Many investors think the yen’s rise would be a pressure point for the BOJ to take an action.

The 20-year yield rose 2 basis points to 0.220%, while the 30-year JGB yield rose 1 basis point to 0.360%.

Longer maturities outperformed due to tight market conditions after month-end buying by pension funds in the previous session.

On Wednesday, the Fed cut rates by 0.25 percentage point as expected, but Chairman Jerome Powell said that is not the beginning of a long series of rate cuts.

“Market players had been expecting that the Fed would be ready to cut rates for a few times as ‘insurance’, almost regardless of economic conditions. But that actually seems still dependent on economic data,” said Takafumi Yamawaki, head of Japan rates and FX Research at JPMorgan Chase.

“So it was a bit of surprise for markets,” he added.

Fed funds rate futures are now pricing in about 60% chance of another 25 basis point cut at the Fed’s next policy meeting in mid-September, much less than nearly 90% before Powell’s comments on Wednesday.

The short-term U.S. bond yields also jumped, with the two-year yield briefly hitting a two-month high of 1.986% in late U.S. trade before stabilising around 1.89%, compared to around 1.85% before the Fed.

The two-year bond yield last stood at 1.892%.

The 10-year yield ticked up 3.0 basis points in Asian trade to 2.051%, giving up a big part of 4.0-basis point fall the previous day. (Reporting by Hideyuki Sano; Editing by Rashmi Aich and Sherry Jacob-Phillips)

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