JGBs hit by Nikkei bounce; 10-yr sale well-received

* JGBs sag on Nikkei’s 1.6 pct rise, weaker Treasuries

* 10-yr JGB sale draws strongest demand since May 2007 auction

* Auction sees demand from investors looking for higher yields

* Minister urges Japan Post bank to diversify beyond JGBs

By Shinichi Saoshiro

TOKYO, Feb 2 (BestGrowthStock) – Japanese government bond futures
slipped further on Tuesday from a one-month peak hit last week,
as stocks rose and U.S. Treasuries fell after better than
expected U.S. manufacturing data.

Futures, however, trimmed losses after a well-received
10-year debt auction brought relief to the market by showing that
investors were willing to tip-toe down the curve in search of
higher yields.

The bid-to-cover ratio, a gauge of demand, rose to 3.62 in
the auction of 2.2 trillion yen ($24 billion) of 10-year bonds
with a 1.3 percent coupon. It was the highest ratio since the May
2007 tender. [ID:nMOFBB5004] (TENDER01: )

“The auction went quite smoothly. One reason for the good
results is that 10-year notes looked cheap compared to other
maturities, attracting demand from investors such as actively
managed pension funds,” said Katsutoshi Inadome, a fixed-income
strategist at Mitsubishi UFJ Securities.

Market players said demand also came from some domestic banks
looking for higher returns, with yields of short- to mid-term
JGBs, their traditional domains, pinned down near four-year lows.

“The second supportive factor is weakness in the JGB market
in the past two days that pushed up the benchmark 10-year yield
to the 1.350 percent level, where many were hoping to buy,”
Inadome said.

The 10-year yield (JP10YTN=JBTC: ) climbed 1.5 basis points to
1.345 percent after hitting 1.350 percent, its highest in three

“For now the 10-year yield appears capped at 1.350 percent,
where buying interest has been strong before and after the
auction,” said Keiko Onogi, a senior JGB strategist at Daiwa
Securities Capital Markets.

The market was little affected by reported comments by
banking minister Shizuka Kamei urging Japan Post to buy more
corporate bonds and U.S. Treasuries. [ID:nTOE61100N]

Kamei told the Financial Times in an interview published on
Tuesday that government-owned financial conglomerate Japan Post
should invest more in corporate bonds and U.S. Treasuries, rather
than Japanese government bonds.

Many analysts doubt Japan Post, which holds more than
three-quarters of its total assets of about 300 trillion yen
($3.3 trillion) in JGBs, could sharply cut its JGB holdings
because of concern that its selling could destabilise the market.

They also say the bank, despite its size, has few financial
experts to make more active investments any time soon.

Although Japan Post attempted to expand its lending since the
government began a 10-year privatisation process in 2007, the
effort fell through and its government bond buying has increased.

March futures slid 0.28 point to 139.12 (2JGBv1: ) after
hitting 139.03. They hit a one-month high of 139.71 last week.

Tokyo’s Nikkei average (.N225: ) gained 1.6 percent, boosted by
a rally on Wall Street the previous day. [.T]

The two-year yield edged up 0.5 basis point to 0.160 percent
(JP2YTN=JBTC: ), while the five-year yield rose 2 basis points to
0.520 percent (JP5YTN=JBTC: ).

The 20-year yield climbed 2 basis points to 2.145 percent
(JP20YTN=JBTC: ). The five-year/20-year yield spread widened a
touch to 162.5 basis points. The spread has been confined to a
narrow range between 160 to 165 basis points for the past month.

Treasuries fell on Monday after strong manufacturing data
renewed inflation jitters. [US/]

Stock Analysis

(Additional reporting by Rika Otsuka; Editing by Michael Watson)

JGBs hit by Nikkei bounce; 10-yr sale well-received