JGBs surge as euro zone woes fuel flight to quality

* JGB futures rise to 7-wk high on 2.6% drop in Nikkei

* Greek and Portuguese debt downgrades spark safe-haven bids

* Curve steepens as midterm, long-end JGBs outperform

By Shinichi Saoshiro

TOKYO, April 28 (BestGrowthStock) – The yield on the benchmark
10-year Japanese government bond fell to a four-month low on
Wednesday on safe-haven bids after downgrades to Greece and
Portugal’s credit ratings sent stocks tumbling worldwide.

JGB futures climbed to a seven-week high as Tokyo shares fell
2.6 percent (.N225: ) following Wall Street’s drop the previous day
after ratings agency Standard and Poor’s slashed Greek debt to
junk status and downgraded Portugal. [ID:nLDE63P0LU]

U.S. Treasuries rallied on Tuesday as the downgrades fuelled
concerns about economic stability in the euro zone, contributing
to the strength in the JGB market, traders said.

“Government bonds like JGBs and Treasuries have fiscal
concerns of their own but they are serving as safe havens at a
time when other government debt has been hit hard,” said Atsushi
Ito, a fixed-income strategist at Morgan Stanley.

Dealers said Japan’s sovereign five-year credit default swap
(CDS) was bid at around 70 basis points from around 67 basis
points (JPGV5YUSAC=MP: ) the previous day, but well below the 87
basis points marked in February, its highest since April 2009.

The JGB yield curve steepened as midterm and long-end JGBs,
which had lagged the recent bull run by superlongs, received a
boost from flight-to-quality bids.

Market players said domestic banks, one of the main investors
in midterm JGBs, were given a further push in their new fiscal
year purchases as the European sovereign debt crisis took a new
turn. Japan’s fiscal year began on April 1.

The five-year/20-year yield spread widened by 2 basis points
to 160 basis points, pulling away from a four-month low of 155
basis points touched earlier in April.

June 10-year futures (2JGBv1: ) rose as far as 139.79, their
highest since March 10, before closing at 139.75, up 0.35 point
on the day.

“Gains in the market have mainly come from strength in
futures, pulling the yield of mid- to seven-year maturities down
the most,” said a senior interest rate trader at a European bank.

Futures were prevented from rising further by lingering
fiscal woes as Japan, the most indebted industrialised nation,
grapples with the issue of reducing its reliance on debt to
finance its budgets.

The recent slide in support for Prime Minister Yukio
Hatoyama’s cabinet has been a sticking point for the market as it
has generated concern that the ruling Democratic Party may opt
for debt-funded economic stimulus to woo voters.

Still, the JGB market’s advance was not expected to flag
anytime soon with flight-to-quality adding momentum to investors’
purchases for the new fiscal year.

“Political uncertainty and fiscal woes will remain as
potential risks, but the market is unlikely to react until it
sees actual numbers,” said Genji Tsukatani, head of fixed-income
investment management at asset manager Schroders.

The five-year yield fell 3 basis points to 0.455 percent
(JP5YTN=JBTC: ), a five-month low. The benchmark 10-year yield
(JP10YTN=JBTC: ) dropped 2.5 basis points to 1.280 percent, its
lowest since late December.

The 20-year yield dipped 1 basis point to a four-month low of
2.055 percent (JP20YTN=JBTC: ) and the 30-year yield fell 1 basis
point to 2.140 percent (JP30YTN=JBTC: ), a five-month trough.

Money

(Additional reporting by Satomi Noguchi; Editing by Joseph
Radford)

JGBs surge as euro zone woes fuel flight to quality