TOKYO: The yield on 10-year Japanese government bonds slipped to a seven-week low on Wednesday, helped by tight repo market conditions, though other maturities were mostly flat ahead of key events in Europe.
In contrast to the cash-bond market, which has been supported by expectations of buying from investors with money in hand, the cost of insuring against a Japanese credit default stood near a record high, rising above the price of Chinese credit default swaps for the first time in six months.
Concerns that Prime Minister Yoshihiko Noda will likely struggle to push his sales tax hike plan through parliament, expected to be convened later this month, were key in pushing the CDS spread wider, market participants said.
"The CDS price reflects foreign players' perception of Japan's fiscal risk. I expect the gap between cash bonds and CDS to stay. If Noda is forced to dissolve parliament, the gap could widen further," said Akito Fukunaga, chief rates strategist at RBS.
While more than 90 percent of JGBs are held by domestic investors, Japanese players rarely trade the country's sovereign CDS, meaning the two markets have very different characteristics.
REPO TIGHTNESS
In the cash bond market, the benchmark 10-year yield fell 1.0 basis point to 0.965 percent, briefly dropping as low as 0.960 percent, its lowest in seven weeks and not far from a one-year trough of 0.940 percent hit in November.
The strength in the 10-year sector largely stemmed from tightness in the repo market, where brokers jostled to borrow the 10-year bonds, as they were caught in short positions after buying from domestic investors in recent days.
The cost of borrowing the current 319th 10-year bonds maturing in Dec 2021 shot up to more than one percent as brokerages rushed to cover their short positions.
The firmness in the 10-year maturity came despite a 2.2 trillion yen auction in the maturity slated for Thursday.
But other tenors were mostly flat, as investors looked to key events in Europe, including bond sales in Italy and Spain, though many market players expect the market to continue to benefit from investor aversion to euro zone debt.
"Domestic banks have money to invest. They are not keen to push yields too low, but the fact is the market can count on their funds at least for the time being," said a trader at a Japanese bank.
The five-year JGB yield was flat at 0.335 percent , while the 20-year yield ticked down to 1.740 percent, near its December low of 1.735 percent. Ten-year JGB futures were up 0.05 point at 142.48.
Japan's five-year CDS spread was indicated at 152/155 basis points, off 156 basis points marked on Tuesday but not far from a record high of 161 basis points hit in October.
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