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JGBs lower after weak 10-year bond auction

TOKYO: Japanese government bonds (JGBs) ended on Tuesday trading lower after an auction of 10-year bonds produced weaker results than the market had expected.

The Ministry of Finance (MOF) offered 1.4 trillion yen worth of 1.8 percent 10-year JGBs on Tuesday, of which 60 percent were offered via auction.

Results of the auction showed weak demand with a bid-to-cover ratio of 1.63, the lowest since last August, and a tail of seven basis points.

The previous 10-year bond auction on January 27 produced a bid-to-cover ratio of 2.50 and a tail of three basis points.

Tuesday's auction produced a lowest price of 100.25 yen, in line with expectations.

Analysts said investors were reluctant to buy the new 10-year bonds due to the low 1.8 percent coupon rate.

"(The result) was really weak. Since almost half of the 10-year bonds auctioned within the past year carried a 1.8 percent coupon, investors didn't really see the need to buy the newly auctioned bonds," said Kazuhiko Sano, chief strategist at Daiwa Securities SB Capital Markets.

"There are plenty of bonds with same the coupon rate in the market already," Sano added.

March JGB futures closed down 0.55 at 132.24 after falling to an intraday low of 132.16.

The yield on the 220th 10-year JGB 0 stood at 1.860 percent, up 0.060 percentage point from late on Monday, while the 219th bond was yielding 1.830 percent, up 0.055 from Monday.

The newly auctioned 10-year bonds were yielding 1.860 percent in the secondary market.

Despite the weak auction result, traders said JGB prices are unlikely to fall much further in the near term.

"When the (cash bond) yield nears 1.9 percent and JGB futures prices near 132.00, I expect investors will start bargain-hunting again." said Chotaro Morita, strategist at Nikko Salomon Smith Barney.

During the morning session, JGBs were hurt by the yen's fall against the dollar, which traders said could help boost Japanese share prices.

The yen fell to a six-month low of 111.73 yen to the dollar on Tuesday and has fallen more than four percent since the start of the month.

Traders said the market will also be focusing on the result of an auction of five-year JGBs on Thursday to determine the trend of the market.

Traders said Standard & Poor's decision to affirm its long-term credit and senior unsecured ratings for Japan at triple-A had limited impact on JGBs on Tuesday.

S&P's moves were in contrast with a warning by Moody's Investors Service last week that it may cut Japan's yen-denominated government debt rating.

September TIBOR-based euroyen futures ended Tuesday's day session at 99.730, unchanged from Monday's day-session close.

Key unsecured overnight call money was mainly traded at 0.02 percent, after the Bank of Japan left the money market with a projected net surplus of 1.0 trillion yen at its regular operation, unchanged from Monday.-Reuters