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JGBs lower, shrug off strong 20-yr auction result

TOKYO: Japanese government bond cash and futures prices were down in late Tokyo trade on Thursday, as strong results at a 20-year JGB auction were unable to offset pressure from profit-taking.

Sentiment was also undermined by minutes of a Bank of Japan (BOJ) Policy Board meeting on November 26, which showed some board members warned it would be too late to change policy after the inflation rate had started to pick up.

March 10-year JGB futures ended down 0.27 at 132.55.

The yield of the key 219th 10-year JGB stood at 1.780 percent up from 1.755 percent late on Wednesday. "The auction itself went very well, but some players decided to take profits after March failed to rise above 133 this morning," said a trader at a Japanese brokerage.

The Ministry of Finance said the 2.4 percent 20-year JGB auction produced a lowest price of 99.80 and an average price of 99.89. The stop rate was 2.414 percent and the average yield 2.408 percent.

The tail was nine basis points on a price basis, compared with 11 basis points in the previous 20-year JGB auction. The bid-to-cover ratio was 2.23, compared with 2.12 in the prior auction. "Today's auction reassured the market that demand is relatively strong, considering that the bid-to-cover ratio was above 2.00 and the tail was nine basis points," said Shunji Sakami, market strategist at Morgan Stanley Dean Witter.

But traders said it was still too early for the market to relax, as a two-year note auction and another 10-year JGB auction, the second this year, are due next week.

Traders also said the BOJ minutes released in the afternoon reminded the market of the risk of a possible end to the central bank's zero interest-rate policy.

"A few members said policy must be forward-looking and it would be too late to change policy after the inflation rate had started to rise," the minutes said.

"The minutes hurt the market, but I don't think there will be a lasting impact," said a trader at a trust bank. "This is because (BOJ Governor Masaru) Hayami is expected to pledge to stick to an ultra-easy monetary policy at the upcoming G7 meeting."

Hayami said on Wednesday he will explain the bank's monetary policy of keeping short-term interest rates at zero percent at a weekend meeting of finance ministers and central bank governors from the Group of Seven industrialised nations.

Hayami also said the bank would have to maintain the current monetary policy until fears of deflation fully subside.

A pledge to maintain the zero interest rate policy is seen as vital for Japan to convince other leading industrialised nations to support Tokyo's efforts to curb the yen's strength.

The BOJ on Thursday left the money market with a surplus of an estimated one trillion yen after its regular money market operation, unchanged from the previous day.-Reuters