JGBs drop as higher shares trim safe-haven demand

TOKYO: Japanese government bonds were lower on Wednesday, after a rise in Tokyo shares trimmed some investor demand for safe havens, but losses were limited as market participants were reluctant to drastically shift their positions ahead of key events such as a policy decision from the Bank of Japan.

Cash bonds in medium maturities were likely being weighed by position adjustment ahead of Thursday's five-year JGB auction, players said. The five-year yield was 1 basis point higher at 0.315 percent , after marking a two-week low of 0.300 percent the previous day.

Long-dated bonds underperfomed as the 10-year price eased, led by weaker futures on Wednesday. The yield climbed 2 basis points to 1.000 percent , off a two-week low of 0.985 percent marked on Tuesday.

Lead 10-year JGB futures declined 0.15 point to 142.91, erasing gains from a 10-month high of 143.07 hit on Tuesday. JGB futures had been buoyed by renewed fears on the euro zone debt crisis and concerns over the US economy slowing.

The Nikkei average climbed 1.4 percent on bargain-hunting on Wednesday after European debt fears sent it tumbling to a 2-1/2 year closing low a day earlier.

But the correction was seen as being limited as market participants were reluctant to heavily shift their positions ahead of the end of the BOJ's two-day policy meeting on Wednesday, and key overseas events such as speeches from US President Barack Obama and Fed Chairman Ben Bernanke, as well as a policy meeting of the European Central Bank on Thursday, said a trader for a European brokerage.

"There will be a rollover (in the month of the lead contract) in JGB futures and a five-year sale tomorrow, which will have a direct influence on JGB yields, but volatility in markets abroad is still high. It is very likely that JGBs will keep being influenced from by overseas factors," he added. The BOJ is expected to stand pat on policy, but may debate more easing if it feels that global recession fears and volatile markets pose such a threat to the country's economic recovery that it warrants additional monetary stimulus. The policy decision expected at 12:30-14:00 p.m. (0330-0500 GMT).

Copyright Reuters, 2011