JGBs jump on US Treasuries, year-end fund relief

Japanese government bonds jumped on Tuesday in the final trading session of 2008, with the benchmark 10-year yield falling to a five-year low, helped by overnight gains in U.S. Treasuries and relief that year-end funding has gone smoothly.

Analysts said a variety of domestic and overseas factors boosted the JGB market, which closed after the morning session on Tuesday and reopens on Jan. 5.

Bonds opened modestly higher after the previous day's gains in U.S. Treasuries, which rose on flight-to-quality bids following an eruption of violence in the Middle East.

March 10-year JGB futures then proceeded to surge more than half a point, giving a boost to cash bonds.

"The market was mostly led by futures. There was relief in the shorter-dated maturities after repo rates came down the previous day," said Atsushi Ito, a fixed-income strategist at Morgan Stanley.

Market participants swap bonds for cash in the JGB repo market, and declines in repo rates can make it easier for brokerages to fund their positions in JGBs.

"Repo rates came down as concerns eased in the money market that participants might not be able to secure enough funds going into the year-end," said Katsutoshi Inadome, a fixed-income strategist at Mitsubishi UFJ Securities.

"Investors also want to cover shorts before the last trading session of the year ends, as other overseas markets will still be open into the new year," he said.
March futures climbed 0.76 point to 140.12.

The five-year yield fell 3.5 basis points to 0.680 percent , the lowest since September 2005.
The benchmark 10-year yield declined 3.5 basis points to 1.165 percent after hitting 1.155 percent, its lowest since August 2003.

The yield curve, which has been flattening this month on recent easing steps by the Bank of Japan and a steadily worsening outlook for the economy, flattened further as some investors extended durations of their bond holdings for the end of the month.

The 20-year yield dropped 3 basis points to 1.690 percent after touching 1.660 percent, its lowest since September 2003.

Market participants are keen to see whether the curve flattening can continue into next year, when issuance amounts of super-long JGBs will increase as Japan relies more heavily on debt with the economy deeper in recession.

Participants are also keeping an eye on BOJ policy in the new year after the daily Sankei Shimbun reported on Tuesday that the Japanese government and central bank are considering launching a $110 billion scheme to buy bad loans and other financial assets from banks using public funds to ease a corporate credit crunch.

The BOJ has already unveiled a series of measures to ease credit strains, cutting interest rates to near zero and deciding to temporarily buy commercial paper outright this month.