Reuters: Market News: JGBs edge up on month-end buying, underperform stocks in 2011/12

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JGBs edge up on month-end buying, underperform stocks in 2011/12 Mar 30th 2012, 07:49 By Hideyuki Sano TOKYO, March 30 | Fri Mar 30, 2012 3:49am EDT TOKYO, March 30 (Reuters) - Japanese government bond prices were firmer on Friday, helped by month-end buying by pension funds and caution over the health of the global economy, although they underperformed stocks in the Japanese financial year that ends this month. Some market players expect profit-taking to set in as soon as the new financial year begins next week as the market will likely need to brace for an increase in government debt sales from next month. At some point in the next quarter, the market is likely to focus on the parliamentary debate over raising sales tax, which Prime Minister Yoshihiko Noda's cabinet finally managed to send to parliament on Friday after long negotiations between the governing coalition parties. The Japanese government on Friday formally approved a plan to double sales tax to help reduce the country's deficit, setting the stage for a parliamentary showdown that could deepen political paralysis. The current parliamentary session is scheduled to run until late June, although it can be extended. "Everyone knows the political battle over the tax will reach a climax in June, so many investors may well think it unwise to buy JGBs ahead of that," said Keiko Onogi, senior JGB strategist at Daiwa Securities Capital Markets. The current 10-year JGB yield fell 1.0 basis point to 0.980 percent, a two-week low, while the 20-year bond yield fell 2.0 basis points to a one-month low of 1.740 percent on month-end buying by Japanese pension funds. The market also drew support from firmness in U.S. bonds, and market players said gains in Spanish and Italian bond yields in recent weeks were rekindling fear over Europe's debt problems. Japan's industrial output fell unexpectedly last month, marginally supporting the market, although most market players expect output to continue to recover in coming months. For the financial year ending March 31, the 10-year yield dropped 27.5 basis points. Nomura BPI, a major Japanese bond performance index, returned about 2.9 percent in the year. Although that was better than the 1.8 percent gain in the previous financial year, it fell short of the performance by Japanese shares. The Nikkei gained 3.3 percent excluding dividend payments. Benchmark June 10-year JGB futures ended the day up 0.02 point at 142.01, with volume reaching only about two-thirds of average daily turnover so far this year. Trading activity is expected to pick up next week when the new financial year begins in Japan, with many market players expecting profit-taking and selling ahead of a 10-year JGB auction on Tuesday. As Japan's borrowing needs continue to rise, the offer of 10-year bonds will be raised to 2.3 trillion yen per month from 2.2 trillion yen now. Given the increase, some traders worry that demand could be weak if the 10-year yield is below 1 percent. They say JGB yields also look a bit too low compared with sharp gains in Japanese stocks in the past couple of months. As a rough gauge, the ratio of the Nikkei divided by the 10-year JGB yield hit the highest level since November 2010. " I think the market has been expecting three things - that the government will submit the (sales) tax bills by end-March, which it did; then there will be a prolonged and bitter debate over the bills; and in the end they will pass the bills. That may come in June or August, but nobody really knows," said a trader at a Japanese bank. "The market cannot trade on something that might happen three months or five months from now, so the focus will be on U.S. data and the Fed's policy." he added. But other traders think the lack of broad support means the issue could even eventually bring down the government, leading to further political chaos. Link this Share this Digg this Email Reprints

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