Japan bonds fall ahead of new auction

Japan's bond futures fell for a second day as stock gains reduced demand for the relative safety of government debt.

Ten-year bond futures for March delivery dropped 0.10 to 139.77 at the Tokyo Stock Exchange. They rose to 140.05 on February 26, the highest this year.

Benchmark 10-year yields also climbed from near a two-month low on speculation primary dealers will reduce holdings of debt to prepare for a ¥2.2 trillion (Dh90.72bn) sale of the securities today.

The yield on the 1.3 per cent bond due December 2019 increased half-a-basis point to 1.305 per cent at Japan Bond Trading Co, the nation's largest interdealer debt broker. The price fell ¥0.044 to ¥99.956. The yield dropped to 1.29 per cent on February 26, the lowest since December 30.

Japan's Ministry of Finance will offer ¥2.2trn of 10-year bonds today. The debt sale is seen as an important test of demand after the 10-year yield last week dipped below the 1.3 per cent threshold for the first time this year.

"Selling ahead of the auction is hurting JGBs in light trade," said Atsushi Ito, a fixed-income strategist at Morgan Stanley. But overall, investor demand looks strong and there are no factors that will boost bond yields sharply higher, Ito said.

"With the auction today, investors don't want to push up prices," said Naomi Hasegawa, a senior debt strategist in Tokyo at Mitsubishi UFJ Securities, a unit of Japan's largest lender by assets. "Stocks are in a firm trend, which keeps a lid on bond prices."

However, expectations the Bank of Japan could ease monetary policy further to support Japan's deflation-plagued economy have been another factor helping government bond prices.

Such views prevented investors from selling bonds aggressively yesterday, limiting losses, traders said.

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