JGBs dip on U.S. discount rate rise; Nikkei limits fall

By Shinichi Saoshiro

TOKYO (BestGrowthStock) – Japanese government bonds fell on Friday, with futures retreating further from a seven-week high, after U.S. Treasuries were hit by the Federal Reserve’s decision to raise the interest rate it charges banks for emergency loans.

The Fed on Thursday raised the discount rate to 0.75 percent to 0.50 percent, a small move but adding to expectations the U.S. central bank could move as soon as later this year to lift the benchmark federal funds rate from its current ultra-low level near zero.

Market players were focusing on how U.S. Treasuries would move in coming sessions in the wake of the Fed’s surprise decision.

The Treasury yield curve bear-flattened, with the two-year/10-year yield spread tightening from record wide levels touched earlier in the week, as the two-year note yield hit a one-month high on speculation over the Fed exiting its low interest-rate policy.

“Many in the market expect JGBs to draw cues from Treasuries, with the curve bear-flattening,” said Katsutoshi Inadome, a fixed-income strategist.

“However, Japan’s central bank may not immediately pursue an exit from its easy monetary policy as it remains committed to fighting deflation and such a stance may prevent short-end JGB yields from rising.”

Inadome added that domestic investors like life insurers could buy more superlong JGBs instead of foreign bonds and add flattening pressure on the curve if the yen weakened further against the dollar on expectations for the Fed to begin normalizing monetary policy.

The curve bear-flattens when short-end yields rise more than long-end yields.

Bank of Japan Governor Masaaki Shirakawa on Thursday fended off government pressure to do more to fight deflation by suggesting the bank is not inclined to set an inflation target or buy more government debt. But analysts see the central bank easing further if economic conditions worsen.

The BOJ left interest rates unchanged at 0.10 percent and held off on new policy initiatives on Thursday.

In focus is how the BOJ handles government pressure going forward. Finance Minister Naoto Kan kept up the heat on Friday, saying he wanted to work with the central bank toward the common goal of beating deflation.

JGBs losses were limited as Tokyo’s Nikkei stock average shed 2.1 percent. (.T: )

March 10-year JGB futures dropped 0.13 point to 139.47, after hitting a seven-week high of 139.76 earlier in the week.

The two-year yield was unchanged at 0.150 percent.

The five-year yield gained 1 basis point to 0.505 percent. The benchmark 10-year yield climbed 1.5 basis points to 1.330 percent.

The 20-year yield rose 0.5 basis point to 2.165 percent ahead of an auction of the maturity next week.

“The Fed’s announcement came after U.S. markets closed. Whether JGBs will respond more may depend on the reaction by other markets,” said Akito Fukunaga, a fixed-income strategist at Credit Suisse.

The five-year/20-year spread was unchanged on the day at 166 basis points on Friday after brushing a decade-high of 167 basis points this week, according to Reuters data.

The curve has steepened as yields of shorter-dated maturities have fallen more than their longer-dated counterparts under the BOJ’s easy policy.

The five-year yield has been hovering near a four-year low as domestic banks, flush with cash under the BOJ’s policy and slack lending, have been parking their money in midterm notes.

In contrast, superlong yields have not fallen as much as the BOJ’s low-rate policy weakens maturities further down the curve.

The dollar rose to a one-month high above 92 yen after the Fed raised the discount rate. (FRX/: )

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(Reporting by Shinichi Saoshiro; Editing by Chris Gallagher)

JGBs dip on U.S. discount rate rise; Nikkei limits fall