JGB futures drop on profit-taking, 20-yr sale draws firm demand

TOKYO: Japanese government bonds futures fell on Thursday on profit-taking after a recent rally, pushing up the benchmark yield to a five-day high, while a 20-year bond sale drew firm demand.

Superlongs outperformed other sectors on the view that near-term demand for the sector was expected to remain solid.

June 10-year JGB futures closed down 0.29 point at 140.60, moving away from a two-month high of 140.97 hit earlier in May, and broke below their five-day moving average around 140.78 for the first time in five days.

A pause in a rally in US Treasuries and a rise in the Nikkei average were also seen hindering JGBs.

The benchmark 10-year yield was up 2.0 basis points at 1.140 percent, hovering above a 5-1/2 month low of 1.105 percent marked earlier in May.

The five-year yield fell 2.5 basis points to 0.435 percent , pulling away from a 4-1/2 month low of 0.410 percent, a level hit several times in recent weeks.

"Profit-taking from players such as Japanese banks is seen weighing on bonds in longer maturities and a firm 20-year auction result didn't drive bonds upwards. It seems 20-year bonds are a little bit overbought compared to 10-year bonds," said a trader at a Japanese brokerage.

The 1.1 trillion yen ($13.4bn) 20-year JGB auction drew decent demand, with the bid-to-cover ratio rising to 3.89 from 2.92 at the previous sale in April, even though the coupon was set at 1.9 percent, 10 basis points lower from the previous tender.

The tender was likely supported by buying from institutional investors seeking to match expected changes in the market's benchmark bond index.

The ratio was also higher than 3.75, the average ratio from the past 12 sales. The tail, the difference between the lowest and average accepted prices, was unchanged at 0.10. For past auction results, click

Superlongs -- such as 20- and 30-year debt -- outperformed other maturities. The yield of No 126 20-year bonds dropped 1.5 basis points to 1.900 percent, while the 30-year yield was down 0.5 basis point at 2.025 percent . They marked four-month lows of 1.885 percent and 2.000 percent respectively earlier this month.

Analysts expect the duration of the benchmark bond index to be extended to around 7.34 years from 7.22 years in June as the amount of bond redemptions will increase to around 13 trillion yen in June 2012 from about 9.5 trillion yen in June 2011.

Foreign investors bought a net 906.8 billion yen ($11bn) of Japanese bonds in the week to May 21, Ministry of Finance capital flows data showed, buying that is likely helping to drive 10-year JGB yields down near five-month lows.

In recent buying, foreigners bought a net 1.38 trillion yen in Japanese bonds in the week ended April 30, their biggest net buying of Japanese bonds on data going back to 2005.

Japanese bonds in short and medium term maturities are likely drawing demand from foreigners, supported by expectations that the Bank of Japan will keep to its ultra-easy monetary policy, analysts said.

"Foreigners are continuing to buy Japanese bonds despite low yields on the view that they are possibly more attractive than other debt such as European bonds which could be weighed down by sovereign debt crises," said Satoshi Igarashi, Portfolio Analyst at BNP Paribas in Tokyo.

Copyright Reuters, 2011