JGBs rise on Europe debt woes but profit-taking weighs

TOKYO: Japanese government bonds rose on Wednesday, supported by European debt worries, though gains were limited as investors took profits after a recent surge in flight-to-quality demand, reflecting their reluctance to chase yields lower.

September 10-year JGB futures rose 0.07 point to 141.52, after briefly falling to 141.35. JGB futures climbed as high as 141.76, a fresh eight-month peak, during Thursday's evening session.

"Yesterday's gains in US Treasuries were modest after recent rallies, suggesting safe-haven demand has eased somewhat compared to the day before ... yields in yen bonds have also declined significantly and this is prompting investors to take profits," said a trader at a US brokerage.

US Treasury prices rose on Tuesday on European debt worries and a solid three-year note sale, but the modest gains suggested investors were wary of demand for longer-dated supply still to come.

The benchmark 10-year yield was down 1 basis point at 1.095 percent, having matched the previous day a seven-month low of 1.085 percent hit in late June.

Moody's cut Ireland's credit rating to junk status on Tuesday, warning that the debt-laden country would likely need a second bailout, while European officials, for the first time, refused to rule out default by Greece. Investors fear the crisis could overtake the bigger European economies of Spain and Italy.

But some JGB investors were sceptical that the euro zone debt crisis would engulf Spain and Italy, making them unwilling to build their portfolios on lower yields such as a 10-year yield below 1.1 percent.

"Because of the rise in the yen, shorter-dated JGBs might be supported by bids from foreigners, but I don't think investors really believe the situation in Italy is that bad," said a fund manager at a Japanese asset management firm, adding that additional yield declines tend to prompt profit-taking from players who bought at lower yields in the past.

Superlongs -- such as 20 and 30 years -- performed well, likely supported by demand from buy-and-hold investors such as life insurers. The yield on 20-year bonds declined 1 basis point to 1.870 percent , touching a six-month low hit in late June, while the 30-year yield dipped 1.5 basis point to 2.010 percent , its lowest since July 1.

Five-year JGBs underperformed as their yield was down a mere 0.5 basis point at 0.390 percent ahead of a 2.4 trillion yen ($30.4 billion) auction on Thursday.

Copyright Reuters, 2011