JGBs futures pare gains ahead of bond sales

TOKYO: Japanese government bond futures edged higher on Monday but shed some of their early gains, capped by upcoming bond sales that weighed on longer-dated cash bonds and steepened the yield curve.

JGBs weakened in thin trade despite a rise in US treasuries and falls in domestic share prices as investors fretted over Japan's political quagmire, which has added to uncertainty over the size and timing of a budget to finance reconstruction after the March 11 earthquake and tsunami.

September 10-year JGB futures were up 0.05 point at 140.95 after initially rising to 141.06 in response to firmness in US Treasuries and falls in domestic share prices.

The five-year yield rose 0.5 basis point to 0.420 percent while the benchmark 10-year yield rose 1 basis point to 1.140 percent, moving away from a six-month trough of 1.105 percent hit last month.

Market players said superlongs were weighed down as participants made room for Wednesday's 1.1 trillion yen ($13.6 billion) 20-year JGB auction, and with ongoing weakness of 30-year bonds after a tepid auction last week other maturities were pulled lower by the superlongs.

"Superlongs may be weighed down ahead of the auction as investors may see current levels as expensive," said Katsutoshi Inadome, a fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities.

"On the other hand, shorter-dated maturities are expected to draw support from expectations that the Bank of Japan may take additional steps to loosen monetary policy in future," he said.

The Bank of Japan is seen likely to keep its policy rate steady at a two-day meeting starting on Monday, but it may top up a loan scheme targeting growth industries.

The 20-year yield rose 0.5 basis point to 1.925 percent and the yield of the 30-year bond was up 1.5 basis points at 2.075 percent. The yield curve steepened with the five-year/30-year spread widening to 165.5 basis points, the most since early May.

With investors expected to stick to the sidelines amid uncertainty over Japan's fiscal policy, including the extra budget, there are few incentives for JGB yields to rise as there are only the 20-year and two-year auctions left this month, said a trader at a European brokerage, adding that the current steepening bias in the yield curve may be short-lived.

The Nikkei average fell 0.7 percent on Monday, hurt by a surprise fall in domestic machinery orders, further signs of a global economic slowdown, and the performance of Toyota Motor after a weaker-than-expected earnings forecast.

US Treasuries rose on Friday as falling stocks and European debt fears spurred a safe-haven rally.

Copyright Reuters, 2011