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JGBs extend losses on Hayami's zero-rate remarks

TOKYO: Prices of Japanese government bonds fell sharply late on Wednesday afternoon, after Bank of Japan Governor Masaru Hayami signalled his impatience with continuing to guide interest rates to zero.

Asked at a regular news conference if conditions were falling into place to end the 14-month-old zero-rate policy, Hayami said: "Yes, I think that's right."

Hayami also said the markets were not wrong to think the BOJ has its sights on ending the zero-rate policy, although he gave no indication as to when that might happen.

Hayami's remarks reached the market after JGB futures trading in Tokyo had closed, although they triggered a fall in JGB futures on LIFFE and in cash JGB prices in Tokyo.

June 10-year JGB futures: stood at 131.08 on LIFFE down sharply from the close in Tokyo at 131.52.

June's turnover in Tokyo on Wednesday was 24,564 lots.

June JGB futures had closed at 131.80 in Tokyo on Tuesday.

The yield on the 10-year 221st JGB stood at 1.820 percent, up sharply from 1.745 percent late on Tuesday. The BOJ said in guidelines issued on February 12 last year that it will initially aim to guide the key overnight call rate to around 0.15 percent and subsequently induce further declines.

Since then, the weighted average of the overnight call rate has been around 0.02 percent.

JGBs had been weak even before Hayami's remarks reached the market, hurt by a rise in Tokyo share prices to 40-month highs and rumours that the Finance Ministry had asked traders for their views on increasing the issuance of 10-year or 20-year JGBs.

A ministry official who handles debt issuance matters denied the rumours, which traders said had knocked 20-year JGB prices lower after a rally over the past week.

The yield on the 46th 20-year JGB stood at 2.135 percent up from 2.080 percent late on Tuesday.

Going forward, traders said they will be watching how medium-term JGBs, which are considered more vulnerable to rises in short-term interest rates, react to Hayami's comments.

"It will be interesting to see how two-year to seven-year JGBs react. There is likely to be a lot of activity from investors," said a trader for a European brokerage house.

Despite jitters about the timing of a possible end to the BOJ's zero interest-rate policy, demand was strong for the new 1.0 percent four-year JGBs the Finance Ministry offered via auction on Tuesday, encouraging bids from investors for JGBs in the medium-term sector, traders said.-Reuters