JGB futures hit 2-year high as Nikkei drops

* JGB futures hit 2-year high for 3rd straight day

* June futures to expire on Thurs, rollover goes smoothly

* Players see Kan administration as JGB supportive

* Banks shift funds to 10-yr notes before 5-yr auction

By Rika Otsuka

TOKYO, June 9 (BestGrowthStock) – Japanese government bond futures
struck a two-year high for a third straight day on Wednesday as a
fall in shares prompted investors to shift funds to safe-haven
government debt.

The yield curve flattened as banks, usually main players in
the midterm sector, put funds into longer-dated notes such as
10-year bonds ahead of Thursday’s five-year debt sale.

Investors are increasingly cautious about chasing JGBs higher
as bond prices have risen sharply in the past two months on fresh
demand at the start of Japan’s fiscal year in April and on fears
about the euro zone’s sovereign debt crisis.

Still, they are continuing to park funds in low-risk JGBs on
worries the euro zone debt problems could spread to other
European countries and the banking sector. Such fears have
sparked risk reduction moves, pushing down Tokyo’s Nikkei average
to a six-month closing low on Wednesday. [.T]

“Investors are concerned about high bond prices. At the same
time there is no reason to trim debt holdings in their portfolios
other than the fact that JGBs are expensive,” said Tetsuya Miura,
chief market analyst at Mizuho Securities. “I think JGBs will
keep on rallying.”

June futures climbed 0.18 point to 141.10 (2JGBv1: ) after
rising as high as 141.19, their highest since March 2008.

June futures will expire on Thursday. Traders said trades
linked to the rolling over between the June and September futures
were proceeding smoothly and unlikely to cause any upset in the
market.

The benchmark 10-year yield fell 3 basis points to 1.200
percent (JP10YTN=JBTC: ), crawling towards May’s trough of 1.190
percent. A fall below that level would take the 10-year yield to
its lowest since January 2009.

FISCAL HAWKS

Japan’s new prime minister, Naoto Kan, has vowed to tackle
the nation’s huge public debt. [ID:nTOE65702H].

In his previous job as finance minister, Kan advocated
capping the amount of new JGB issuance.

“The market looks at him as a fiscal hawk. Thus his becoming
the country’s leader is supportive for government bonds,” said a
bond trader at a European brokerage.

New Finance Minister Yoshihiro Noda said on Tuesday he would
aim to keep new government bond issuance at 44.3 trillion yen
($484 billion) or below in the next fiscal year. [ID:nTOE657056]

The five-year yield edged down 1 basis point to 0.370 percent
(JP5YTN=JBTC: ), hovering just above a seven-year low of 0.365
percent reached on Monday.

The Ministry of Finance will sell five-year notes worth 2.4
trillion yen ($26.22 billion) on Thursday. Few worried about the
market digesting the new supply as bank demand remains strong.

Japanese bank lending posted its biggest annual fall in
nearly five years in May, as companies remained reluctant to
boost capital spending. That leaves banks with surplus cash to
invest.

The 30-year yield was down 2 basis points at 2.040 percent
(JP30YTN=JBTC: ). The 20-year yield slipped 2.5 basis points to
1.955 percent (JP20YTN=JBTC: ). A fall below that level would take
the 20-year yield to its lowest since last July.

Traders said the superlong bond yields fell following the
Bank of Japan’s outright JGB buying operation earlier in the day.
[ID:nBOJJ8002B]

Life insurers, big investors in the superlong sector,
remained on the sidelines a day after the MOF’s 30-year debt
auction met with demand weakest in six years due a steep fall in
the 30-year yield.

Stock Investing

($1=91.51 YEN)
(Editing by Michael Watson)

JGB futures hit 2-year high as Nikkei drops