JGBs climb as stocks tumble

Japanese Government bonds (JGB) gained yesterday, with 10-year futures climbing to a two-week high, as stocks fall from a 15-month peak spurred buying of safe-haven debt.

"The five-year sale is expected to proceed smoothly. The maturity appears more affordable after the recent correction," said Katsutoshi Inadome, a fixed-income strategist at Mitsubishi UFJ Securities.

"Demand from banks is also expected as their lending activity has yet to pick up," said Inadome.

The five-year yield dipped 0.5 basis point to 0.510 per cent. The yield has pulled back from a four-year low of 0.425 per cent struck last month. The benchmark 10-year yield fell 0.5 basis point to 1.315 per cent, while the 20-year yield edged up 0.5 basis point to 2.125 per cent.

JGBs were also helped by US Treasuries, which rose on Friday. But gains were limited ahead of a ¥2.4 trillion (Dh95.5 billion) five-year auction and a ¥1.1trn 20-year sale on Thursday. The auctions were awaited with cautious optimism following last week's well-received 40-year JGB tender.

The bond market was also keeping an eye on what impact Japan's political situation might have on recently bullish Tokyo equities.

Politics grabbed further attention after the No 2 executive in Japan's ruling party vowed on Saturday to stay in his post despite a funding scandal that could scupper the party's chances of winning a mid-year election and raise the risk of policy deadlock.

"Japanese stocks appear to be reacting negatively to the latest political developments, in addition to the stronger yen, and this is helping JGBs," said Noriyuki Fukuda, a strategist at Morgan Stanley.

The yen bounced back broadly against its peers late last week. A stronger yen can support JGBs by reducing the cost of imported goods which in turn can stoke deflation.

Traders said Japan's five-year credit default swap spread changed hands at 81 basis points yesterday, edging towards an eight-month peak of around 82 basis points hit late in November last year.

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