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JGBs lower on Miyazawa remark, pricey 5-yr auction

TOKYO: Japanese government bonds (JGBs) ended lower on Tuesday on remarks by Finance Minister Kiichi Miyazawa that yields were abnormally low and concerns that a closely watched auction produced prices that were too high.

Miyazawa told parliament early in the afternoon that the current 1.7 percent yield on the benchmark 10-year JGB was not normal and that such low rates could not be expected when the economy recovers.

Also weighing on the market, traders said, was hedge-related selling by dealers who worried that the lowest price at a debut auction of new five-year JGBs may have been too expensive for investors.

The auction of 800 billion yen in five-year bonds, with a coupon of 1.0 percent, produced a lowest price of 100.19.

The results showed relatively sound demand, with a bid-to-cover ratio at 1.96 and a tail of six basis points.

"There was speculation in the market that the bid-to-cover ratio could be three or four times, but it was still considered a healthy result, as it (the five-year bond) is expected to become the benchmark for the medium-term sector," said Masaaki Mizuno, chief strategist at Paribas Capital Markets in Tokyo.

Traders said that, with the lowest price coming in so high, the market is now focusing on how much buying interest investors show in the secondary market, where the yield of the newly auctioned five-year bond was last trading at 0.98 percent.

The March JGB contract: ended offered-only at 133.21, down 0.32 point but above the the day's low of 133.09 hit shortly after the auction.

The yield on the key 220th 10-year cash bond was at 1.755 percent, up from 1.715 percent at the close of trade on Monday. The introduction of five-year interest-bearing notes was part of a Finance Ministry scheme to diversify maturities of JGBs, in order to prevent a massive fiscal spending programme from driving up long-term interest rates and derailing the economic recovery.

The ministry has historically avoided issuing five-year JGBs as they would have directly competed with five-year bank debentures, the main source of financing for long-term credit banks.

On top of Miyazawa's remarks, comments from senior Ministry of Finance official Takatoshi Ito also weighed on JGBs, traders said.

He stressed that monetary policy was the sole preserve of the Bank of Japan, which for a year has driven short-term rates essentially to zero to support the economy and ward off deflation.

He added: "With nominal rates at zero, if they were to move it could only be upward."

The Finance Ministry said on Tuesday it plans to offer a total of 10.8 trillion yen worth of financing bills (FBs) in auctions in February, or 2.7 trillion yen per week.

The market showed little reaction to the release of jobs data, which showed a rise in unemployment but did not change the market's outlook for economic recovery.

The December jobless rate rose to 4.6 percent from 4.5 percent in November. The December jobs-to-applicants ratio was unchanged from the previous month at 0.49.

September TIBOR-based euroyen futures were at 99.645, down 0.02 from Monday's day-session settlement.

In the money market, the BOJ conducted an outright Treasury bill selling operation for the first time to absorb short-term funds from the money market.

Money market dealers said the operation did not signal any shift in monetary policy, however.

The BOJ offered at its operation to sell 100 billion yen worth of Treasury bills outright in an agreement starting on February 4.

The BOJ left the money market with a projected net surplus of 1.0 trillion yen after its regular operation.

The key overnight call rate was mainly traded at 0.02 percent, unchanged from Monday's weighted average.

Three-month certificates of deposit were issued at 0.07 percent on Tuesday.-Reuters