JGB sentiment sags on share rally, Europe

TOKYO: Sentiment in the Japanese government bond market deteriorated as investors expected a recent rally in Tokyo share prices to continue and concerns about the European debt crisis subsided, a Reuters weekly survey showed on Monday.

The latest poll's JGB bull-bear diffusion index, calculated by subtracting the number of bearish market players from those that are bullish, turned negative for the first time in three weeks, skidding to minus 26 from plus 6 in the previous survey.

Euro zone finance ministers are expected to approve a 130 billion euro ($171 billion) rescue programme for Greece at a meeting on Monday.

The Nikkei share average was up more than 1 percent on Monday, breaking above 9,500 for the first time since early August, on Greek bailout prospects and the weekend move by China to ease policy by cutting banks' reserve requirement ratio.

The poll showed 50 percent of respondents expect a rise in long-term interest rates, compared with 22 percent in the previous survey, when 50 percent expected little movement.

In the latest survey, 26.1 percent expected little movement, while 23.9 percent expected them to fall, compared with 28 percent in the previous survey.

Most of the respondents who expected higher rates attributed this to rising share prices, cited by 65.2 percent, while 52.2 percent pointed to the effect of higher European and US rates.

Improving stock market fundamentals have lifted risk appetite and a bull phase is beginning, which players believe will weigh on bonds, said a fund manager at an asset management firm.

The 10-year JGB yield ended at 0.945 percent on Friday, closer to a 14-month low of 0.935 percent hit last month, after the Bank of Japan unexpectedly eased policy on Tuesday by saying it would spend an extra 10 trillion yen on JGBs as part of its asset-buying programme.

But some expected the BOJ impact to continue to pressure rates.

"The BOJ's decision has changed market sentiment completely. Fundamentally, the yield curve will be pressured from the short end. I expect the 10-year yield to fall to its low for the year of 0.935," said Kazuhiko Sano, a strategist at Tokai Tokyo Securities.

The online survey of 93 market players from major institutions received 46 responses, or 49.5 percent. It was conducted from Friday afternoon until 8 a.m. on Monday.

Copyright Reuters, 2012