JGB futures set to snap 4-day rally on factory data, US Treasuries

TOKYO: Japanese government bond futures looked set to finish a four-day rally on Wednesday, with a fall in US Treasuries and stronger-than-expected factory output data nudging the benchmark yield up from a seven-month low.

* September 10-year JGB futures declined 0.30 point to 141.30, off a seven-month high of 141.63 hit on Tuesday and breaking below a five-day moving average near 141.40 for the first time in five days.

* Traders said moves were led by selling of futures, likely from commodity trading advisers (CTA) and Japanese banks, and that medium-term maturities such as seven-year cash bonds were weaker than others partly because an auction of five-year US Treasury notes drew weak demand on Tuesday.

* "Investors such as regional banks were buying on dips, but selling from close positions in futures increased after breaking triggers including 141.28," said a trader at a foreign brokerage.

* Japan industrial output jumped in May and supported talk of a V-shaped recovery, also weighing on JGBs.

* "It is natural for JGB yields to go up because Japan's recovery from supply chain disruptions after the earthquake will likely buoy upcoming economic indicators in the United States," said Naoki Tsuchiyama, a market economist at Mizuho Securities, adding that the 10-year yield would rise above 1.1 percent if the US 10 year yield decisively climbs beyond 3 percent.

* The benchmark 10 year yield was down 3 basis points at 1.115 percent , after marking a seven-month low of 1.085 percent on Tuesday.

* But losses are expected to be limited, supported by stable demand from cash-rich domestic investors who have seemingly been immune to negative factors for bonds. "Bond players overseas are increasingly becoming sensitive to bearish factors, but JGB players are still bullish and still focused on bond positive factors such as Greece's problems and the global economic slowdown," said Shogo Fujita, chief Japan bond strategist at Bank of America Merrill Lynch.

* US Treasury prices fell on Tuesday as expectations Greece will approve an austerity plan to win financial aid and avoid a debt default dampened the bid for safe-haven US government debt. Investors' lack of appetite for Treasuries was evident in the weakest sale of five-year Treasury notes in a year.

Copyright Reuters, 2011