May 18, 2009 / 9:14 AM / 10 years ago

JGB futures up on stocks, Moody's ups local debt

* Moody’s unifies JGB ratings, ups domestic to Aa2

* Futures lifted by fall in stocks but stay in recent range

* Market awaits five-year JGB auction on Tuesday

By Kaori Kaneko

TOKYO, May 18 (Reuters) - Japanese government bond futures rose on Monday, taking an upgrade in Japan’s local currency bond rating by Moody’s in stride and gaining a lift from a fall in share prices, which supported demand for lower-risk debt.

Moody’s Investors Services raised Japan’s JGB rating to Aa2 from Aa3 but downgraded the foreign currency bond rating to Aa2 from AAA to unify them at the same level. [ID:nT181044]

The news came as daytime trading in JGB futures closed and the lead future for evening trade 1JGBv1 held steady at 137.30, just a tick down from the close on the daytime contract at 137.31 2JGBv1, above last week’s 6-1/2-month trough of 136.30.

“Moody’s changes in its ratings were to correct gaps, which is natural in a way, but it is hard to understand the timing of this,” said Chotaro Morita, chief fixed income strategist at Barclays Capital in Tokyo.

“Most yen bonds are financed by Japan’s huge domestic savings, so changes in JGB ratings won’t necessarily impact on the JGB market.”

The benchmark 10-year JGB yield fell 2 basis points to 1.405 percent JP10YTN=JBTC, with gains coming before the news from Moody’s, and traders said the cash market was supported by a fall in stocks.

The Nikkei share average .N225 fell 2.4 percent to 9,038.69. [.T]

“The JGB market is watching whether the Nikkei will fall and stay below 9,000 points, which would be closer to the JGB market’s view on the economy,” said Takafumi Yamawaki, senior bond strategist at BNP Paribas.

Debt market investors expect the downturn has probably passed its worst but is a way off a solid recovery, a more pessimistic view than stock investors, traders say.

“Also, those who have not bought bonds at the start of fiscal year on heightened supply concerns and the recent stocks rally seem to be showing buying appetite,” Yamawaki said.

Investors are now awaiting the Ministry of Finance’s 2 trillion yen ($21 billion) sale of five-year JGBs on Tuesday. TENDER01

The coupon will likely be set at 0.8 percent, down from 0.9 percent for the same tender last month, but it could draw solid demand from players such as banks, market watchers said.

The five-year yield declined 1.5 basis points to 0.790 percent JP5YTN=JBTC and the 20-year yield fell 3.5 basis points, to 2.050 percent JP5YTN=JBTC. ($1=95.19 Yen)

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