JGBs gain on 20-year auction afterglow

Japanese government bond prices rose on Friday with 20-year bonds extending gains after a strong auction the previous day, pushing yields down towards multimonth lows hit earlier in the month. A series of soft economic data in the United States that sparked a rally in US Treasuries also spurred short-covering.
Twenty-year bonds led the gains, with the yield falling 2.5 basis points to 1.890 percent, having touched a four-month low of 1.885 percent hit last week. Market players said appetite for 20-year bonds was strong after an auction of 1.1 trillion yen ($13.5 billion) in new 20-year paper on Thursday.
Some market players said the bond market is likely to be supported for the time being, as the government is expected to take a few more months to compile its second post-quake supplementary budget for spending on reconstruction projects. "The JGB yield will likely hit bottom for the year this quarter. The government is likely to submit a supplementary budget in August, so yields will likely rise around that time," said Hidenori Suezawa, chief strategist at SMBC Nikko Securities.
A fall in the 10-year US Treasury yield below a key technical level is also prompting short covering in JGBs, players said. Treasuries rallied on Thursday as weaker-than-expected economic data and renewed concerns over Greece's debt added to demand for safe haven debt.
"The consensus used to be that the economy was not as good as before but still hadn't lost all its momentum. But that consensus is changing following a series of bad economic data," said Takafumi Yamawaki, chief rates strategist at J.P. Morgan.
Data on Thursday showed new US claims for unemployment benefits rose unexpectedly to 424,000 last week, marking the seventh straight week above the 400,000 level, indicating growth in the labour market was soft. Meanwhile, the US government's second estimate of first-quarter gross domestic showed growth unrevised at 1.8 percent, below forecasts for 2.1 percent.
The 10-year yield fell 2.5 basis points to 1.115 percent, edging closer to this year's low of 1.105 percent hit last week. The five-year yield fell to a five-month low of 0.405 percent. The benchmark 10-year JGB futures ended up 0.28 point at 140.88 after marking a 1-1/2 month high of 141.00. Futures have remained boxed in a range of roughly 140.40 to 141.00 this month.
"The market has been capped around this area this month. But as this boxed range has lasted for nearly a month, it will be broken soon. At the moment, it looks likely that futures will break out above it rather than below it," said a trader at a European brokerage.