Markets News

JGB 5-year yield falls to 4-year low as Nikkei sags

* Weak Nikkei, post-auction demand push 5-year yield down

* Nikkei hits 3-week closing low as Chinese shares dive

* Yield curve steepens, superlongs sold before 20-yr sale

TOKYO, Aug 19 (Reuters) - The five-year Japanese government bond yield fell to a four-year low on Wednesday and bond futures advanced to a one-month high as Tokyo’s Nikkei stock average slipped late in the day.

The JGB yield curve steepened as longer-dated debt prices dipped on selling ahead of a 20-year auction next week. Equity markets have been in focus as bond investors waited to see whether regional stocks regain their footing after suffering a sharp downturn earlier in the week.

JGB buyers showed strong appetite for government debt at a five-year auction on Tuesday, but market participants said demand could be tempered by the pull of assets perceived to involve more risk, including stocks, if equities pull through their latest adjustment phase and resume their advance.

But Tokyo's Nikkei stock average .N225 slid 0.8 percent on Wednesday to a three-week closing low, hit by a late tumble in Shanghai shares .SSEC. [.T]

Not all JGB maturities benefited from weaker stocks.

“Shorter maturity JGBs are supported by the Bank of Japan’s easy monetary policy, while longer-dated bonds are being weighed by extra supply concerns,” said Katsutoshi Inadome, a fixed-income strategist at Mitsubishi UFJ Securities.

Japan’s ruling Liberal Democratic Party has been trailing the main opposition Democratic Party in polls ahead of a general election on Aug. 30, but there is concern over fiscal discipline being loosened by pump priming policies regardless of which party wins.

The bond market had to contend with more immediate supply events in the meantime as dealers began selling in the super long zone to make room for next week’s 20-year JGB sale.

September 10-year JGB futures gained 0.12 point to 138.87 after hitting 138.91, their highest in a month.

“Futures have led much of the bond market’s advance over the past week,” said Noriyuki Fukuda, a fixed-income strategist at Morgan Stanley.

Trading in bond futures has often been choppy as key players such as hedge funds and commodity trading advisers trade while keeping an eye on many other markets ranging from equities to commodities, analysts said.

The two-year yield dipped 0.5 basis point to 0.250 percent JP2YTN=JBTC and the five-year fell 1 basis point to 0.645 percent JP5YTN=JBTC, its lowest since September 2005.

The benchmark 10-year yield edged up 0.5 basis point to 1.345 percent JP10YTN=JBTC.

The 20-year yield climbed 1.5 basis points to 2.120 percent JP20YTN=JBTC and the 30-year rose 2 basis points to 2.280 percent JP30YTN=JBTC.

The two-year/20-year yield spread widened by 2 basis points to 187 basis points.

An auction of 5.7 trillion yen ($60.2 billion) of three-month Treasury discount bills (TDBs) drew solid demand on Wednesday, with the lowest accepted yield of 0.1428% being the lowest in more than three years.

Japanese banks have been heavy buyers of TDBs, as these institutions look to park their funds -- made ample as corporate loan demand has slackened during a recent economic downturn -- in the perceived safety of liquid, short-term government paper. (Reporting by Shinichi Saoshiro)