JGBs up as Nikkei sags; 2-yr sale, issue plan eyed

* Weaker Nikkei, surge in Treasuries help to fuel JGB rise

* Focus on 2-year auction, JGB issuance plan

* Tensions on Korean peninsula also eyed

By Shinichi Saoshiro

TOKYO, Dec 20 (BestGrowthStock) – Japanese government bonds edged up
on Monday, extending the previous session’s rally, buoyed by
weaker Tokyo stocks and a continued recovery in U.S. Treasuries
after last week’s sharp sell-off.

A wait-and-see mood prevailed, however, ahead of a string of
potentially market-moving events later in the week including a
two-year bond sale and Japan’s debt issuance plan for the next
fiscal year, limiting JGB gains.

“The two-year auction will be in focus as it will test
investor appetite after demand at recent bill offerings was
patchy,” said Katsutoshi Inadome, a fixed-income strategist at
Mitsubishi UFJ Morgan Stanley Securities.

“We can gauge whether deposit-bearing investors are willing
to park their money in short-term JGBs, or simply hold onto it as
cash.”

Japan’s Ministry of Finance will offer 2.6 trillion yen ($31
billion) of two-year JGBs on Wednesday, the last coupon-bearing
auction of the year.

March 10-year JGB futures (2JGBv1: ) gained 0.04 point to
139.85, running out of steam by late trade after peaking at a
two-week high of 140.15.

The March JGB contract had surged nearly a full point on
Friday on hopes that battered U.S. Treasuries had finally
bottomed out.

ISSUANCE CAP

The benchmark 10-year yield (JP10YTN=JBTC: ) dipped 1 basis
point to 1.180 percent while the five-year yield (JP5YTN=JBTC: )
was unchanged at 0.470 percent.

Tokyo’s Nikkei (.N225: ) shed 0.9 percent on 10,216.41,
pressured by a slide in Shanghai stocks (.SSEC: ) that weighed down
China-related shares. [.T]

“JGB prices were supported, but they struggled to extend
strong gains as market operators were unwilling to hold on to
large long positions with the market basically in a holiday
mood,” said Takeo Okuhara, fund manager at Daiwa SB Investments.

“I don’t think we’ll be able to find a clear direction this
week. The key futures contract is expected to move around 139 to
140.”

Tensions on the Korean peninsula were another focal point,
but the market impact has been limited so far after the South
Korean military started a planned firing drill on Monday despite
threats of war from Pyongyang, while an emergency U.N. Security
Council meeting failed to agree on how to defuse the crisis.
[ID:nL3E6NK01M]

Market participants are also watching whether Japan sticks to
its 44 trillion yen cap on new bond issuance, as expected.

Japan’s government hopes to compile the next fiscal year’s
budget by Friday, with JGB issuance plans for the year also
expected to be unveiled towards the end of the week.

The government will be working out budget details while the
ruling Democratic Party struggles with a deepening rift over a
scandal-plagued powerbroker.

Few see the latest political turmoil affecting this week’s
budget and debt process, although it may be difficult to discount
the longer-term policy consequences of the squabble.

“The bond market’s immediate focal point is on the likelihood
of new issuance for next year finally being settled around 44
trillion yen, which would close the curtain on a process that has
worried the market for a while,” said Akito Fukunaga, chief rates
strategist at RBS Securities in Tokyo.

“From a much longer-term perspective, the political situation
is only working to further cloud policy prospects and prospects
of fiscal reform.”
($1=83.94 Yen)
(Additional reporting by Chikafumi Hodo; Editing by Edmund
Klamann)

JGBs up as Nikkei sags; 2-yr sale, issue plan eyed