JGBs trim losses

Japanese government bond prices trimmed earlier losses as buyers emerged on dips, but longer-dated debt was seen continuing to exert steepening pressure on the yield curve on the threat of a future increase in debt issuance. Futures volumes have recovered to over 25,000 lots per day for the past two days, the highest since mid-March, with possible speculative moves seen.
June 10-year Japanese government bond futures dipped to a two-month low of 138.38, but they trimmed losses as buyers emerged on dips, players said. In cash bonds, the yield on current 10-year debt climbed 2.5 basis point to 1.330 percent, its highest since mid-February. Its spread over the two-year yield rose to 112 basis points, the highest in 10 months.
The recent steepening trend eased somewhat, however, with the 20-year yield edging down 0.5 basis point to 2.085 percent after hitting a three week high of 2.105 percent the previous day. But worries about a future increase in government debt sales continued to hurt long-dated bonds, while short-term paper was supported by expectations that the Bank of Japan will keep policy loose and maintain short-term interest rates near zero in the foreseeable future.
The 30-year government bond yield hit a three-week peak of 2.270 percent before slipping back to 2.250 percent, still up 1.0 basis point on the day ahead of a 700 billion yen 30-year bond sale on Tuesday. Market participants said investors were wary of long-dated bonds facing downward pressure because Japanese insurance companies, big buyers of the maturities, might have limited appetite due to their need to make insurance payments after the earthquake and tsunami.
Japan is likely to form an initial supplementary budget worth a bigger-than-expected 4 trillion yen ($47 billion) for relief efforts after last month's disaster, National Strategy Minister Koichiro Gemba said on Thursday. The budget will focus on removing debris, building temporary housing and restoring infrastructure such as schools and providing financial support. Japanese media have said the government was likely to avoid more borrowing to fund the initial extra budget, although there is some debate within the ruling party over whether the government should issue bonds.
"Whether they issue bonds or not this time does not really matter. The bottom line is they will have to compile more supplementary budgets and they will have to increase debt sales at a certain point. So investors are not in a hurry to buy bonds," said Shinji Nomura, chief fixed income strategist at SMBC Nikko Securities. Still, bonds are likely to be supported in the near term as the Japanese economy looks set to suffer a slowdown after destruction from the natural disaster and disruption in supply chains, market players said.