Bargain hunting emerges to help JGBs bounce off lows

TOKYO: Japanese government bond futures slipped on Friday as safe-haven demand eased after euro-zone leaders agreed on a package to help Greece, but they trimmed losses as players bought on dips.

Market participants said Japanese banks were among those buying, adding that the outlook for next week will turn on whether active bargain-hunting will be sustained at yields above 0.4 percent on five-year bonds and 1.1 percent on 10-year bonds .

"Short- and medium-dated bonds had been weighed down by profit-taking from Wednesday, but dip buying emerged today as yields moved up," said RuiXue Xu, a fixed-income strategist at RBS Securities.

September 10-year JGB futures were down 0.10 point at 141.42, trimming losses from the day's low of 141.31 but holding above the upper end of the gap from 141.04-25 that emerged on July 12, and which is seen as support.

The benchmark 10-year yield was up 1 basis point at 1.100 percent, while the yield on five-year bonds was unchanged at 0.390 percent after marking the week's high of 0.400 percent.

Superlongs -- such as 20-year and 30-year bonds -- also trimmed losses. The 20-year yield was unchanged at 1.860 percent , suggesting new bonds auctioned on Thursday drew firm demand from investors.

The five-, 10- and 20-year yields declined earlier this week to their lowest levels since November as debt crises on both euro-zone and the United States stoked risk aversion in financial markets.

European leaders have agreed on a bailout package that would make it easier for Greece to reduce debt more sustainably by easing terms of loans and by making Greek bond investors shoulder some of the burden.

The leaders also made provisions for limiting the damage if, as seems likely, credit rating agencies declare Greece to be in temporary default, with the European Central Bank now dropping its opposition to a selective default of Greek debt.

Markets cheered the package as it was far more ambitious than expected earlier this week although it did not dispel worries about Europe's longer-term debt woes.

"We can say the rescue plan was bolder than expected, but while share prices and the euro rose, they did not climb to recent highs and losses in bond prices were limited as a result," said a trader at Japanese bank.

The market also remains focused on developments in US debt talks.

While efforts to craft a $3 trillion deficit-reduction deal gained traction on Thursday, the White House and Republicans have not broken their impasse over higher taxes, which are opposed by the Republicans, who control the lower house.

Most market players expect some sort of deal by the Aug. 2 deadline to raise the $14.3 trillion debt ceiling and avoid default.

Copyright Reuters, 2011