20000201

JGBs lower but tone firm before 5-year auction

TOKYO: Japanese government bonds (JGBs) closed lower on Monday, retracing last week's rally amid downward pressure from a rise in Tokyo stock prices, which defied sharp losses on Wall Street overnight.

Market participants were also detected selling JGB futures to unwind spread trades.

But market sentiment remained upbeat, traders said, on expectations of solid demand at Japan's debut auction of five-year interest-bearing government bonds on Tuesday.

March JGB futures: closed down 0.79 at 133.53 after dipping to an intraday low of 133.44, their lowest since hitting 133.19 on January 24.

The yield on the key 220th cash bond was at 1.715 percent, up from Friday's close of 1.660 percent. "There were no incentives to take the market higher after its sharp advances last week, so that prompted traders to liquidate some long positions," a trader at a city bank said.

"Traders who were also expecting the Nikkei to fall in the wake of Wall Street's declines were also forced to close their positions after stocks turned positive," he added.

The benchmark Nikkei stock average closed at a 30-month high, up 104.92 at 19,539.70.

March JGB futures were also indirectly hurt as large-lot selling pushed three-month TIBOR-based euroyen futures lower. Selling emerged to hedge against paying positions in yen swaps, traders said.

September euroyen futures fell to 99.660 from Friday's day-session settlement of 99.700.

Vague talk that a US credit agency would downgrade Japan's soverign debt also hurt the market in late trade.

But traders said such movements were not likely to upset the market's underlying firm tone.

"Traders are a bit wary after the recent rally, and we failed to see any investor-led bargain-hunting in cash bonds. But investors aren't dumping bonds either, so today's movements are not likely to change the market's trend," another trader at a city bank said.

Comments by Bank of Japan Governor Masaru Hayami on Monday, which largely echoed other recent statements, did not surprise the market as operators focused on the outcome of five- and 30-year bond auctions this week.

In prepared remarks to a meeting of BOJ branch managers, Hayami said Japan's economy had turned towards improvement, primarily driven by exports and industrial output, but said the BOJ should maintain its zero interest-rate policy until deflation concerns had been dispelled."

On Tuesday, the Finance Ministry is set to offer 800 billion yen worth of five-year coupon-bearing notes via an auction.

Dealers expect the coupon to be set at 1.0 percent or 0.9 percent.

"There should be strong demand at the auction as many dealers are willing to bid for the inaugural issue. With market sentiment strong now, the issue should draw aggressive demand from the market," a city bank trader said.

Talk that some hedge funds were actively unwinding positions to cover losses in US Treasuries swept through the markets but traders said they saw little impact on the yen bond market.

"It's hard to assess how much hedge funds hold in yen-based positions and how much of that is in JGBs. But I imagine that those rumoured hedge funds do not have huge JGB positions so any direct impact is not likely to be too great," an analyst at a major Japanese brokerage said.

The key unsecured overnight call rate was mainly trading at 0.02 percent, unchanged from Friday's weighted average, after the BOJ left a projected net surplus of 1.0 trillion yen in the money market at its regular operation.-Reuters