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JGBs surge as stocks dive, eyes on US shares

TOKYO: Japanese government bond cash and futures prices surged on Monday, propelled by a slide in the Nikkei stock average, which at one point was down more than eight percent, after record declines on Wall Street on Friday.

Traders said the JGB market would continue taking its cues in the near term from activity in the US equity markets, with further losses in stocks likely to spur more flight-to-quality buying in bonds.

Most-active June 10-year JGB futures jumped to a fresh contract high of 132.41 in the morning, up more than one point from on Friday's close, and the yield of the 221st 10-year cash bond sagged to a 2 month low of 1.695 percent.

Players rushed to cover short JGB positions that had been accumulated after Bank of Japan (BOJ) Governor Masaru Hayami last week strongly signalled his impatience with Japan's ultra-easy monetary policy of guiding short-term interest rates virtually to zero, traders said.

They said the BOJ's pledge at a Group of Seven nations meeting on Saturday to continue the zero-rate policy was a supportive factor for JGBs, but the market was primarily reacting to stock price movements.

"The source of energy behind today's activity was stocks," said Hiroaki Kurata, senior manager at Credit Lyonnais in Tokyo said.

"Everyone was selling bonds after Hayami's comment, so they were busy covering shorts," he said.

The Nikkei average was battered on Monday, falling more than eight percent at one point before ending at 19,008.64, down 6.98 percent.

June 10-year JGB futures: ended at 132.23, up 0.83 point from Friday.

The yield on the 221st 10-year JGB stood at 1.700 percent, down 0.090 percentage point from on Friday's close. But by late afternoon, the rally had eased as the Nikkei share average stopped declining. The Nikkei pared some of its lossed to close at 19,008.64., down 6.98 percent, still its fifth-biggest drop ever.

Traders said the market also grew cautious when the yield of the 221st 10-year cash bond sagged below 1.7 percent a level Finance Minister Kiichi Miyazawa warned about in early February.

Miyazawa then rocked the bond market by saying that the then-prevailing 1.7 percent yield on the benchmark 10-year JGB was "not normal", reiterating that a rise in long-term interest rates cannot be avoided when the economy recovers.

Some were watching a talk among senior members of the coalition parties, who are discussing various measures including the use of public funds to support plunging Tokyo stock market.

Chief Cabinet Secretary Mikio Aoki agreed with LDP policy chief Shizuka Kamei's idea that steps are needed to support Tokyo share prices, according to the party's deputy policy chief, Shin Sakurai.

Kamei was earlier quoted as saying the Japanese government should take emergency measures, possibly using one trillion yen ($9.58 billion) in public funds, to support stock market.

Sakurai said Aoki had told Kamei the three parties should discuss the idea before any action was taken.

A city bank trader said: "I'm very sceptical and wonder where this one trillion yen would come from, but if they do support the stock market, that would be negative for bonds."

In the short end of the market, TIBOR-based September three-month euroyen futures were at 99.705, up 0.065 point from on Friday's day-session settlement.

As the contracts rose sharply on the back of stocks' fall, Tokyo International Financial Futures Exchange (TIFFE) called for emergency additional margin payments from members on Monday.

The TIFFE calls for additional margin payments when the key futures contract moves by more than 0.055.

The TIFFE last asked for additional margin payments on Thursday, when the September contract rose 0.055 to 99.640. It was only the fourth time it had issued such a call since last June.

The key overnight call rate was mainly traded around 0.02 percent, unchanged from the weighted average level on Friday.-Reuters