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JGBs regain strength to end at fresh 7-mth high

TOKYO: March 10-year Japanese government bond futures regained strength after late rounds of active short-covering drove them to a fresh seven-month high of 134.32 at the Tokyo close on Friday, dealers said.

March futures retained their bullish trend, reinforced by healthy results from Thursday's 10-year JGB auction and drawing strong bids on price dips from investors.

"The fact that the March contract managed to sustain 134 invited fresh last-minute short-covering from investors," a Japanese city bank trader said.

"The supply-and-demand factor is ruling the market. We still see many investors holding short positions in the market so the current bullish sentiment should stay," he said.

The current upward trend in the JGB market began at the start of the week after the Group of Seven communique, issued after its meeting last Saturday, pressed the Bank of Japan to maintain its zero interest-rate policy. This has supported the belief that the BOJ's current credit policy would last much longer, dealers said.

The March futures contract was at 132.85 in Tokyo on January 21, a day before the G7 meeting.

The contract's low on Friday was 134.05, compared with a Tokyo close of 133.94 on Thursday.

Traders said futures briefly lost ground in the afternoon as oversupply concerns in municipal bond markets intensified.

Japan's Ministry of Home Affairs announced in the afternoon that public offerings of government-guaranteed municipal bonds for February issue were set at 1.7 percent compared with 1.8 percent in the previous month.

Overall sentiment was hurt slightly as selling pressure in the municipal bond market spilled over into the JGB market after the announcement, but the impact was short-lived.

"The terms (of the municipal bonds) initially depressed the mood as the coupon rate was set lower," another Japanese city bank trader said. "But it ended up providing bargain-hunting opportunities for some investors in the JGB market."

Cash JGBs were also supported by bargain-hunting appetite from public funds rumoured in the new 220th 10-year cash JGB, but many institutional investors turned nervous about chasing it beyond 1.660 percent, dealers said.

The yield of the 220th JGB was at 1.665 percent, down from 1.690 percent on Thursday.

Traders said the strong government forecast issued for Japan's industrial output in January induced light profit-taking in the morning.

Industrial production in December fell 1.4 percent from the previous month, in line with a consensus forecast for a 1.5 percent decline as shown in a Reuters survey this week.

The Ministry of International Trade and Industry forecast it will rise 3.6 percent in January, and by 0.6 percent in February.

But the JGB market showed little reaction to weak consumer prices and household spending data, which were as expected.

Consumer prices in metropolitan Tokyo fell 1.1 percent in January from a year earlier, the fifth consecutive month of decline. Nationwide consumer prices fell 1.1 percent in December from a year earlier and 0.3 percent from November.

Spending by Japanese wage earners' households fell a real 4.7 percent in December from a year earlier, the fifth consecutive month of decline.

In the shorter-end of the market, TIBOR-based September three-month euroyen futures slipped to 99.700 at the close from Thursday's day-session settlement of 99.710 .

The key overnight call rate was mainly trading at 0.02 percent, flat from Thursday'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