JGB futures rise to 10-wk high on regulation worry

* Nikkei dips on concern about tighter financial regulation

* JGB five-year yield drops to five-month low

* Curve steepens ahead of 20-year JGB auction

By Shinichi Saoshiro

TOKYO, May 19 (BestGrowthStock) – Japanese government bond futures
climbed to a 10-week high on Wednesday, boosted by gains in U.S.
Treasuries and a drop in Tokyo shares after Germany’s ban on
naked short-selling and an ensuing slide in the euro spurred
investor risk aversion.

JGB futures gained after Treasuries rose sharply, with
investors looking for a safe haven as they grew fearful that a
new chapter could unfold in the European debt crisis following
Germany’s move to ban naked short-selling of euro-denominated
government bonds, credit default swaps based on those bonds, and
some financial stocks. [ID:nN18512882]

“The move by Germany is being viewed in the JGB market as the
latest phase in the fiscal saga facing Europe,” said Koichi Ono,
a senior strategist at Daiwa Securities Capital Markets.

“JGB yields are moving almost exclusively on external
factors, not domestic ones, and the situation looks like it will
continue for a while.”

June 10-year JGB futures rose as high as 140.18, their
highest since March 10, before ending at 140.04 (2JGBv1: ), up 0.19
point on the day.

Dealers said the repo market in Tokyo remained calm in the
wake of the regulation worries.

JGB futures and cash bonds can rally when some issues become
tight in the repo market — where dealers lend and borrow cash in
exchange for JGBs — with increased demand for funds.

“There is no sense in the market that the regulation moves
will spread. Although JGBs are bought today, that is not due to a
direct impact from the German move, and there is no reaction in
the repo market either,” said a senior dealer at a major money
market brokerage in Tokyo.

Focus was on whether other governments will follow Germany’s
ban on short selling.

“The problem with restricting short selling is that it
reduces liquidity. Tackling the root of the problem by improving
Greece’s fiscal situation might cause market volatility. But even
higher volatility could result if liquidity is reduced by
restrictions on short selling,” Takayuki Atake, chief credit
analyst at Nikko Cordial Securities, said at a seminar on
Wednesday.

In naked short-selling, a trader sells a financial instrument
short, betting that its price will fall, without first borrowing
the instrument or ensuring that it can be borrowed, as would be
done in a conventional short sale.

CURVE STEEPENS BEFORE SUPERLONG AUCTION

Strength in JGB futures helped the yield on the reopened
five-year notes auctioned the previous day to fall to a
five-month low. The five-year yield was down 1 basis point at
0.445 percent after dropping as low as 0.435 percent
(JP5YTN=JBTC: ), its lowest since Dec. 22.

The benchmark 10-year yield fell 1 basis point to 1.285
percent (JP10YTN=JBTC: ), but stayed above its five-month trough of
1.250 percent hit earlier in the month.

The 20-year yield was unchanged at to 2.095 percent
(JP20YTN=JBTC: ) and the 30-year yield was also flat, at 2.185
percent (JP30YTN=JBTC: ).

Gains in JGBs were capped as dealers sold to make room in
their books ahead of Thursday’s 20-year bond sale.

The yield curve steepened slightly, with the
five-year/20-year yield spread widening to a two-month high of
165 basis points.

Tokyo’s Nikkei stock average (.N225: ) fell 0.5 percent. [.T]

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(Additional reporting by Satomi Noguchi; Editing by Chris
Gallagher)

JGB futures rise to 10-wk high on regulation worry