JGBs dip; little impact from political turmoil

* JGBs incher lower as Nikkei trims losses

* Caution before 10-year bond auction weighs on JGBs

* Little reaction to SDP leaving ruling coalition

By Masayuki Kitano

TOKYO, May 31 (BestGrowthStock) – Lead 10-year Japanese government
bond futures inched lower on Monday, taking in their stride the
Social Democratic Party’s (SDP) decision the previous day to
leave Japan’s ruling coalition.

Any factors that erode the ruling coalition’s political clout
or lead to a decline in Prime Minister Yukio Hatoyama’s
popularity can be regarded as negative for JGBs as they may raise
doubts about the the ruling parties’ willingness to tackle fiscal
consolidation, analysts say.

“This piece of news is not something that is necessarily
positive for yen bonds, especially super-long bonds,” said Makoto
Yamashita, chief Japan interest rate strategist for Deutsche
Securities.

The departure of the tiny SDP is a blow to Hatoyama, already
seen by voters as a weak leader, damaging his Democratic Party’s
chances of winning a majority in an upper house election expected
in July, which it needs to pass bills smoothly. [ID:nSGE64T00L]

But the SDP’s leaving the ruling coalition was only the
latest setback for Hatoyama, whose popularity has been in a
declining trend, and JGBs took the news in stride because of
that, market players said.

JGB futures edged higher initially, taking their cues from
gains in U.S. Treasuries late last week and a fall in the euro
after credit ratings agency Fitch downgraded Spain’s debt on
Friday.

But JGB futures later trimmed their losses as Tokyo share
prices (.N225: ) eked out a 0.1 percent gain after dipping earlier
in the day and as market players braced for an auction of 10-year
JGBs on Tuesday.

June 10-year JGB futures dipped 0.04 point to 140.41
(2JGBv1: ), pulling away from a two-year peak of 140.88 hit last
week.

The benchmark 10-year JGB yield rose 1 basis point to 1.260
percent (JP10YTN=JBTC: ), having pulled up from a low of 1.190
percent struck last week that matched a trough hit in December.

Focus on Tuesday will turn to a 2.2 trillion yen ($24
billion) auction of 10-year JGBs.

Market players said demand for the new paper is likely to be
sufficient as long as the 10-year yield hovers near 1.3 percent,
given factors such as the uncertain outlook for share prices.

“If the yield stays near 1.3 percent, there will probably be
some buying needs although buying could be tempered if the bonds
are priced above par,” said Jun Fukashiro, chief fund manager for
Toyota Asset Management.

Domestic investors will probably be reluctant to buy 10-year
JGBs if yields dip towards 1.2 percent, Fukashiro said.

“It has been just two months since the start of the new
fiscal year, and I think 1.2 percent is a difficult level for
investors to buy actively. I think changing investment strategies
to such an extent is a bit difficult,” he added.

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($1=91.05 Yen)
(Editing by Chris Gallagher)

JGBs dip; little impact from political turmoil