TOKYO: Japanese government bonds extended gains on Wednesday as investors remained sceptical on whether European leaders are doing enough to stop the region's financial woes infecting its banks, underpinning demand for safe-haven debt and pushing the 10-year yield near a 10-month low.
Long-dated JGBs outperformed other maturities, after lead futures extended gains on Wednesday on buying from foreign players, prompting cash-bond purchases from Japanese banks waiting for prices to fall after Tuesday's drop in US bonds, traders said.
December 10-year futures rose 0.19 point to 142.73, a clear break above resistance on technical charts, triggering buying and marking a third consecutive day of gains.
"I feel financial markets have overreacted in recent days, with JGB yields marking multi-month lows, but the debt crisis in the euro zone is not likely to be resolved easily," said Shogo Fujita, chief Japan bond strategist at Bank of America Merrill Lynch. "JGBs are expected to remain firm because investors have so much cash to invest."
He added that he may cut his 10-year yield forecast for the second half of the current fiscal year ending in March 2012 from 0.8-1.3 percent.
The 10-year cash yield declined 2 basis points to 0.970 percent on Wednesday, approaching a 10-month low of 0.965 percent hit in September.
It performed better than other maturities as demand from investors for Tuesday's 2.2 trillion yen ($28.7 billion) 10-year sale was strong despite a lower coupon.
Short-term notes were also firm with Wednesday's auction of three-month bills producing a stop-rate of 0.0978 percent, dipping below 0.1 percent, the interest rate paid on excess reserves banks park at the Bank of Japan.
" It is unlikely that the BOJ will take additional steps at its next policy meeting later this week, but there are so many investors with excess cash and they are being forced to put money into short-dated notes with smaller risks," said a fund manager at a Japanese asset management firm.
Europe's debt crisis will keep the Bank of Japan on edge as its board meets this week, but the central bank is expected to leave monetary policy on hold unless a turn of events unleashes a shock market reaction threatening Japan's recovery prospects.
The yield curve bull-steepened at its long-end as gains were subdued in superlongs such as 20- and 30 years. Although by small amounts, investors were lightening their holdings of the maturities in expectation that they may face additional bond issuance in the fiscal year starting in April 2012, market participants said.
The 20-year yield was down 1.5 basis point at 1.690 percent, while the 30-year yield was flat at 1.900 percent.
The 10- and 30-year yield spread expanded to its widest in two weeks at 93 basis points from a recent low of 87.5 basis points marked in late September.
European finance ministers agreed on Tuesday to safeguard their banks as doubts grew about whether a planned second bailout package for debt-laden Greece would go ahead.
However, tensions remained as euro zone officials postponed a crucial aid payment to Greece until mid-November.
Japan on Wednesday offered its share of help, saying it would consider continuing its purchases of bonds issued by Europe's bailout fund.
Comments
Comments are closed for this article.