Nikkei tumbles more than 2 pct
Mon Nov 20, 2006 2:02 AM ET
By Naomi Tajitsu
TOKYO, Nov 20 (Reuters) - Japanese government bond prices jumped on Monday as investors snapped up the safe-haven securities on a more than 2 percent slide in Tokyo shares and following gains in U.S. Treasuries late last week.
The market was little swayed by comments from Bank of Japan Governor Toshihiko Fukui over the weekend, who repeated the central bank's stance that it would raise rates gradually should the economy continue to expand.
December futures <2JGBv1> jumped 0.42 point to 134.88 as investors snapped up bonds on the slide in stocks. The Nikkei share average <.N225> fell 2.3 percent, hitting a two-month low and posting its worst one-day drop in four months.
Analysts said that unless the sell-off in stocks extends much further, the bond market would have a tough time racking up more gains.
"Nikkei losses have helped to take the 10-year yield under 1.7 percent, but the market is very conscious of that level, and it's unlikely that the yield will fall much further," said Takafumi Yamawaki, a fixed income strategist at Morgan Stanley.
JGBs have clawed back after taking a hit on data last week showing surprisingly strong growth in the third quarter, which kept alive the possibility of the BOJ next raising rates in December.
The benchmark 10-year yield <JP10YTN=JBTC> fell 3 basis points to 1.680 percent.
The two-year yield <JP2YTN=JBTC> fell 4 basis points to 0.765 percent, pulling further away from a three-month high of 0.835 percent touched last week.
The gap between two- and 10-year yields widened to 91.5 basis points as investors took profits on curve flattening trades. The curve had flattened to a three-year low of 87 basis points last week.
Short- to medium-term maturities led the market's gains, with the five-year yield <JP5YTN=JBTC> sliding 5.5 basis points to 1.190 percent.
The yield on the 20-year JGB <JP20YTN=JBTC> inched down half a basis point to 2.160 percent.
JGBs were also boosted as U.S. Treasuries rose on Friday after data showing housing starts hitting a six-year low in October kept investors focused on the possibility of the Federal Reserve cutting rates next year.
But December futures had a tough time overcoming chart resistance and need to rise above 134.93 to do so, traders said.
"The way this market is, it's very choppy," said one interest-rate swaps dealer at a Japanese brokerage. The dealer also said foreign investment banks were cautious about holding risky trades with their business year ending later this month.
RATES TO RISE
Speaking at a Group of 20 meeting of finance ministers and central bankers in Melbourne on Sunday, Fukui said the group's call for countries to normalise monetary policy was not directed specifically at Japan.
That followed his remark on Friday that the chance of a rate rise next month from 0.25 percent was not particularly high.
"Fukui is aware that rates must rise," said Hidenori Suezawa, chief fixed income strategist at Daiwa Securities SMBC."He has not strayed from his recent message. A rate rise in January-February is most likely, although there remains a slight chance of a December lift."
There are few major economic events this week and Japanese markets will be closed for a holiday on Thursday, so the main event will be an 800 billion yen ($6.79 billion) auction of 20-year bonds on Tuesday.
Analysts expect the coupon on the new issue to be set at 2.2 percent, lower than the previous issue's 2.3 percent.
While the lower coupon could hurt demand, analysts said investors such as domestic life insurers continue to show interest for the maturity in the 2.2 percent region and were likely pick up the new issue. (Additional reporting by Eric Burroughs) ($1=117.87 Yen) (Editing by Hugh Lawson; Reuters messaging: naomi.tajitsu.reuters.com@reuters.net; Tel +81-3-3432-8657))
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