20000113

JGBs edge lower despite solid auction result

TOKYO: Japanese government bond (JGB) prices edged lower by late Tokyo trade on Wednesday despite solid results at a closely watched auction, as investors remained wary of a heavy supply of new bonds set to hit the market this month.

An auction of 1.4 trillion yen in 1.8 percent 10-year JGBs produced a lowest price of 100.80, with 19.7787 percent of the bids accepted at that price.

"The auction results were more or less normal and judging from this, I don't see any need to be worried about the next (10-year JGB) auction," said Takeshi Naito, senior market economist at Daiwa SB Capital Markets.

While the volume of total bids for the new 10-year JGBs, at 2.0643 trillion yen, was disappointing compared with 7.3218 trillion yen in bids for three-month financing bills also auctioned on Wednesday, the amount was sufficient to dispel fears about a lack of investor demand, Naito said.

But the March 10-year JGB futures, which began easing after midday, extended their losses after the auction results were announced, pressured by hedge-related dealer selling amid thin investor demand in the secondary market.

"There has been talk that many investors would not take fresh large positions until they see the results of the six and 20-year bond auctions next week," said a dealer at a Japanese trust bank.

March JGBs shed 0.30 point from the previous day's finish to close at 132.00.

The yield of the key 218th 10-year JGB stood at 1.725 percent up from 1.710 percent on Tuesday. Losses in the JGB market were expected to be limited in the short term, however, as players were eager to hunt for bargains, dealers said.

"We also expect to see more buying from public investors starting tomorrow, after the results of the year's first 10-year JGB auction," another trust bank dealer said.

Next week, the Ministry of Finance (MOF) will hold auctions for six year bonds on Tuesday and 20-year bonds on Thursday.

There will also be another 10-year JGB offering on January 27.

Daiwa's Naito said that this time around the ministry may have been able to attract investors to the new 10-year bond by setting a generous 1.8 percent coupon rate.

"A coupon rate of 1.7 percent was sufficient based on market conditions, but it seems likely that MOF raised the coupon rate as a concession to the concentration of JGB auctions in January," he said.

One big concern in the bond market going forward was how auctions for medium-term JGBs would pan out, traders and analysts said.

Due to an increase in the issuance of medium-term bonds in fiscal 2000/01, the yield curve is likely to flatten further with medium-term JGB yields rising while long-term JGB yields remain steady, Naito said.

A separate auction on Wednesday of 2.7 trillion yen in three-month financing bills produced a lowest accepted price of 99.957, with 65.0323 percent of the bids accepted at that price.

The Bank of Japan (BOJ) continued to absorb excess liquidity it supplied to the market late last year to meet fund demand resulting from Y2K-related concerns.

The bank left the money market with a projected fund surplus of 13.7 trillion yen after its operations, down from a surplus of 16.6 trillion yen on Tuesday.

Money dealers said the BOJ was reducing the Y2K-related fund surplus at a slightly faster pace than expected. But the money market remained calm with limited impact on key overnight call money, which was trading near 0.02 percent.

Dealers said the daily fund surplus may fall to around two trillion to three trillion yen early next week, nearing the usual one trillion yen level.

Elsewhere, key TIBOR-based September three-month euroyen futures stood at 99.530 on TIFFE, down from Tuesday's settlement of 99.540.-Reuters