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JGBs slip as stocks rise, outlook unclear

TOKYO: Japanese government bonds (JGBs) and futures sagged on Friday in trading driven by technical factors related to a benchmark shift in JGB futures, but dealers said the market's overall direction was unclear.

A modest gain in the Nikkei stock index drove speculators to liquidate long JGB futures positions, taken earlier on a view that the Nikkei may tumble after a fall in the Dow Jones industrial average overnight.

June 10-year JGB futures: ended trade at 130.45, down 0.22 point from its Tokyo close of 130.67 on Thursday.

The June became the new benchmark 10-year JGB futures contract since its turnover on Friday exceeded the turnover of the March contract.

Turnover of June contract was 46,135 lots, while that of on March was 25,292 lots on Friday. The yield on the 219th on March 10-year JGB was at 1.880 percent, up 0.01 percentage point from late on Thursday.On the Tokyo Stock Exchange, the key Nikkei 225 average rose 246.44 points or 1.26 percent to close at 19,817.88.

Analysts said JGBs are expected to remain in a confined range in the near-term, but cash-rich investors, lacking attractive investment alternatives elsewhere, are expected to return to buy cash bonds when 10-year JGB yields rise to 1.9 percent.

The market will keep an eye on January preliminary industrial production data to be released at 8.50 a.m. on Tuesday next week. Traders said the market expects a rise of 2.7 percent to 3.0 percent.

"It's a pretty strong forecast, but the JGB market has largely ignored output data lately, so I don't expect the data to rattle the market," Toshio Aoki, strategist at Tokai International Securities said.

In the short-term money market, interest rates are rising as financial institutions stockpile funds as a precaution against leap year computer glitches, money traders said.

JGB repo rates have risen to 0.20 percent, from around 0.05 percent on Wednesday, money brokers said. Two-day call money for the period from February 28 to March 1 was trading at 0.20 percent on Friday.

But the rise is expected to be short-lived as the Bank of Japan (BOJ) is expected to inject ample extra funds into the money market. Confidence inspired by the Y2K-bug free rollover to the new millennium is also minimising upward pressure, traders said.

There are concerns some computer systems may malfunction because February 29, 2000 is a special type of leap date which occurs only once in 400 years.

On Friday, the central bank increased the projected net surplus in the money market to 1.3 trillion yen, up from the daily average of 1.0 trillion yen in recent weeks.

A BOJ official said the central bank increased the projected net surplus to avoid a rise in interest rates prompted by leap year factors.

Some traders said they expect the BOJ to raise the surplus to around five trillion yen on February 28, and 10 trillion yen on February 29.

The JGB market showed no reaction to news that Japan's top banking regulator, Michio Ochi, was under pressure to resign after he was reported to have suggested that bank audits should be more lenient, dealers said. Elsewhere, the September TIBOR-based euroyen futures contract ended the day session at 99.715, down from Thursday's day-session close of 99.725.-Reuters