JGB 5-yr yield hits 5-yr low, Kan taken in stride

* 5-yr yield dips to 0.395 pct, matches June 2005 low

* Sector seen supported by cash-rich domestic banks

* Ruling DPJ picks Finmin Kan as next prime minister

By Masayuki Kitano

TOKYO, June 4 (BestGrowthStock) – The five-year Japanese government
bond yield hit its lowest level in five years on Friday,
supported by recent demand for medium-term notes from cash-rich
domestic banks.

The JGB market took in stride news that the ruling Democratic
Party of Japan had picked Finance Minister Naoto Kan, a fiscal
conservative, as the country’s next prime minister. [ID:nPOLJP]

Kan had been widely regarded as the front-runner for the job.

Although Kan’s views on fiscal and monetary policy are seen
as bond-market friendly, there is uncertainty about just how
aggressively he will be able to rein in Japan’s rising debt
issuance.

“Kan has spoken out in favour of fiscal consolidation and has
also put pressure on the Bank of Japan, so the market’s
expectation is that this may lead to additional monetary easing
measures from the BOJ,” said RuiXue Xu, a rates strategist at RBS
Securities Japan.

“But the market will want to confirm whether or not he will
deviate from his prior stance and whether the government will
unveil its medium-term framework and long-term targets for fiscal
policy in June as scheduled,” she said.

The yield curve steepened as five-year notes outperformed,
while super-long bonds lagged behind.

The five-year JGB yield dipped 1 basis point to 0.395 percent
(JP5YTN=JBTC: ), matching a low hit in June 2005. A drop below that
level would take the five-year yield to its lowest level since
August 2003.

The amount of deposits parked at banks is far greater than
the loans they are extending, which means domestic financial
institutions have surplus cash that they can allocate to JGB
investment, market players say.

This cash surplus and the upcoming maturing of some 9
trillion yen ($97.3 billion) in JGBs in June, has contributed to
the strength of five-year notes, said Akitsugu Bandou, a senior
economist for Okasan Securities.

Lead June 10-year JGB futures rose 0.06 point to 140.50
(2JGBv1: ).

The benchmark 10-year JGB yield edged up 0.5 basis point to
1.280 percent (JP10YTN=JBTC: ), but was down from the day’s high of
1.290 percent.

A bond dealer at a Japanese brokerage house said JGBs were
supported by investor buying of 10-year cash bonds.

Stock Market Analysis

(Editing by Michael Watson)

JGB 5-yr yield hits 5-yr low, Kan taken in stride