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JGBs move higher after strong auction result

TOKYO: Japanese government bonds (JGBs) ended higher on Wednesday as stronger-than-expected results from an auction of 10-year bonds lifted sentiment, traders said.

The Ministry of Finance (MOF) offered 1.4 trillion yen worth of 1.9 percent 10-year JGBs, of which 60 percent were offered via auction.

The auction met brisk demand with a bid-to-cover ratio of 3.05 the highest since a September 10-year bond auction in 1998 and a tail of four basis points. The previous 10-year bond auction on February 22 produced a bid-to-cover ratio of 1.63 and a tail of seven basis points.

Wednesday's auction produced a lowest price of 100.70 yen, higher than market consensus of 100.65.

"Given bullish economic data released recently, which heightened speculation about when the Bank of Japan will end its zero-rate policy, the market wasn't expecting a strong result at first," said Kazuhiko Sano, chief strategist at Daiwa Securities SB Capital Markets.

"But the market is still full of cash, and the 1.9 percent coupon was well received by the market," he said.

A European bank trader said: "The result was surprisingly strong. Given a coupon rate of 1.9 percent, we were expecting a fair result, but not this strong."

Traders said a large-lot bid of about 250 billion yen from a European bank was detected.

"This bank has bid about 30 percent of the bonds that were offered via auction," said another European bank trader.

June futures ended trade at 130.85, up 0.25 point from on Tuesday. The yield on the 219th JGB was at 1.830 percent from 1.865 percent on Tuesday. The newly auctioned 1.9 percent 10-year bonds were yielding 1.845 percent in the secondary market.

The European bank trader said the well-bid auction was also due to about five trillion yen worth of bond redemptions seen this month. "Many might have purchased new bonds with the money they receive from redemptions," he said.

Some traders had been pessimistic about the auction result given recent bullish economic data and ahead of the introduction of mark-to-market accounting standards in April.

Risk-averse investors have been shortening bond durations before the change, which will force banks to adopt more transparent book-keeping methods and to include unrealised gains and losses on income statements. The longer end of the yield curve is normally more risky for investors because of the greater time duration.

Despite the strong auction result, traders expect further gains to be limited, especially before the April 3 release of the key "tankan" survey of business sentiment.

"As capex and other economic data have improved and the BOJ has moderately upgraded its economic assessment, it (the tankan) will be a big market-moving factor," Daiwa's Sano said.

In the short end of the market, September TIBOR-based euroyen futures were unchanged at 99.665, up from on Tuesday's day-session settlement of 99.640.

The key unsecured overnight call rate was mainly traded at 0.02 percent, down slightly from the weighted average rate of 0.03 percent on Tuesday.

The BOJ said an increase of 400 billion yen in its current account balances, or broadly defined money market liquidity, is expected after its regular operation on Tuesday.

Money market dealers said that calculated under the previous method, the BOJ left a projected net surplus of 1.6 trillion yen after Wednesday's operation. The net surplus was at 1.3 trillion after the operation on Tuesday.-Reuters