Reuters: Market News: JGBs gain on tight repo rates ahead of financial year-end

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JGBs gain on tight repo rates ahead of financial year-end Mar 26th 2012, 07:09 Mon Mar 26, 2012 3:09am EDT * Lending rates for 5, 10-yr current bonds up ahead of year-end * Futures in sight of filling chart gap * Many expect rally to be capped around 1 pct in 10-yr yield * Market looks to whether PM Noda can persuade his party to agree to tax hike By Hideyuki Sano TOKYO, March 26 (Reuters) - Japanese government bonds gained on Monday, drawing strength from tightness in the bond lending market ahead of Japanese financial year-end later this week as well as from a continued recovery in U.S. bonds. Many market players expect JGBs to be trapped in a tight trading band towards the year-end on March 31, but one wild card, some market players say, is uncertainty over whether Japanese ruling parties will endorse a fiscal reform plan Prime Minister Yoshihiko Noda has been pushing for. The 10-year JGB futures rose 0.20 points to 141.81, climbing above last week's high of 141.76 to hit their highest level in almost two weeks. The futures are now within sight of filling a chart gap created between 141.59 - 141.90 earlier this month, when the market tumbled on expectations of strong U.S. growth and waning prospects of additional easing by the U.S. Federal Reserve. "Unless you come back to the level, you don't feel like the market has fully recovered," said a trader at a Japanese brokerage. There were strong bids in the current five- and 10-year cash bonds, due to tightness in the repo, or bond-lending, market, where brokers normally borrow the issues they have short-sold. Some investors who are normally willing to lend bonds to brokers typically refrain from doing so near the financial year end for regulatory reasons, often causing a short-squeeze in the lending market. As a result, brokers who were unable to borrow bonds were forced to buy them back in the cash bond market instead. The 10-year cash bond yield fell 1.5 basis point to 1.020 percent, extending its slide from a 3 1/2-month high of 1.060 percent hit earlier this month. The yield on the current five-year bonds also fell 1.5 basis points at 0.325 percent. U.S. bond yields dipped on Friday on fresh concerns over Europe and worries about slower growth, mildly supporting JGBs. "It seems like the market is getting worried about the global economy again. But on the other hand, as long as U.S. and Japanese shares stay at current highs, it's hard to expect the 10-year yield to fall below one percent," said Ryosuke Goto, market analyst at Daiwa Securities Capital Markets. Expectations that some pension funds will buy JGBs at the end of month to extend the duration of their portfolio are also supporting the market. Such a view was behind an improvement in the JGB market shown in a Reuters weekly survey on Monday. The survey's JGB bull-bear diffusion index rose to plus 7 from minus 12 in the previous survey, rising to positive territory for the first time since mid-February and matching a high hit in late January. But some market players also think investors could start profit-taking once the new financial year begins, especially if the 10-year cash bond yield edges near the one percent mark. There is also concern that JGBs could suffer a setback if Prime Minister Noda fails to get support for his sales tax hike bills from his own party's lawmakers this week. Japanese media has reported that Noda plans to try to win over those who opposed the bill later this week so his cabinet can approve the bill by the end of this month. "I suspect those opposing lawmakers will back down in the end. But if Noda can't persuade them, that would be negative for JGBs," said Shinji Nomura, chief bond strategist at SMBC Nikko Securities. Getting support from his own party is just one of many hurdles for Noda to push through his tax hike plan aimed at narrowing Japan's deficit. With his coalition lacking a majority in the upper house, he needs help from opposition parties, but so far they have showed few signs of cooperation. Link this Share this Digg this Email Reprints

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