JGBs bounce on Treasuries, Japan budget eyed

* Futures jump half a point, speculators cover shorts

* Eyes on whether Treasuries can make bounce more convincing

* Focus also on whether Japan can keep new JGB issuance cap

By Shinichi Saoshiro

TOKYO, Dec 17 (BestGrowthStock) – Japanese government bonds gained on
Friday, with futures jumping more than half a point as
participants covered shorts after a rebound in U.S. Treasuries
brought some relief following a week of heavy selling.

Buoyed by short-covering by speculators, March 10-year
futures (2JGBv1: ) were up 0.51 point at 139.42 after hitting
139.52, a one-week high.

The lead contract had sunk as low as 138.16 earlier this
week, an eight-month low, as JGBs were buffeted by a steep drop
in Treasuries.

Investors have emerged this week to bargain hunt across the
board in sizable lots during the downturn, but market players say
the retreat in Treasuries will have to halt convincingly before
JGBs can embark on a sustained rebound.

Shinji Nomura, chief fixed-income strategist at Nikko Cordial
Securities, said the other premise the JGB market would need for
it to bottom out was for the government’s budget process for
fiscal 2011/12 to proceed without a major surprise.

“Even if the process involves measures such as digging up
hidden cash reserves, the government has shown firm resolve in
keeping its self-imposed cap on new debt issuance, which the
market now expects,” Nomura said.

Japan’s government approved tax guidelines for fiscal 2011/12
on Thursday and hopes to compile next fiscal year’s budget by Dec
24. [ID:nTOE6BF06E]

Of particular interest to the JGB market is whether the
government can stick to a cap on new bond issuance of 44 trillion
yen ($524 billion).

A Reuters poll of 12 Japanese government bond strategists and
analysts, conducted from Dec. 9-14, showed that players expect
new JGB issuance to total 44 trillion yen in fiscal 2011/12, and
the market may not welcome a breach of the cap. [ID:nTKG006995]

The 20-year yield (JP20YTN=JBTC: ) dropped 3.5 basis points to
2.020 percent.

The benchmark 10-year yield (JP10YTN=JBTC: ) fell 4 basis
points to 1.230 percent, pulling away from a seven-month peak of
1.295 percent hit on Wednesday.

The five-year yield was down 2 basis points at 0.515 percent
(JP5YTN=JBTC: ) after hitting a 13-month peak of 0.600 percent on
Wednesday.

JGB yields hit peaks when a sell-off in their U.S.
counterparts this week was at its heaviest.

Treasuries have been the JGB market’s main driver this week,
in part because their recent sharp plunge has forced domestic
investors such as banks to sell JGBs to cover losses in their
foreign bond holdings.
($1=83.97 Yen)
(Editing by Michael Watson)

JGBs bounce on Treasuries, Japan budget eyed