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JGBs firmer, market sees modest Q1 growth

TOKYO: Key March 10-year Japanese government bond futures ended firmer on Friday as worries of an early end to the Bank of Japan's zero interest rate policy were eased by subdued first-quarter growth forecasts. "January-March gross domestic product may turn out to be negative and there's still a lot of uncertainty about the stock market going forward," said a portfolio manager for a trust bank.

In such an environment, the BOJ is unlikely to scrap its zero interest rate policy too soon, and the central bank is likely to keep its monetary policy unchanged when its Policy Board meets for the first time this year on Monday, traders said.

The median forecast of 22 economists polled by Reuters on Japan's gross domestic product in the first quarter of 2000, predicted growth of 0.4 percent.

The highest forecast predicted growth of 1.9 percent and the lowest a contraction of 0.6 percent.

Key March JGB futures ended at 132.37, up from Thursday's close of 132.08. Turnover was a moderate 36,119 lots.

The yield on the key 219th 10-year JGB stood at 1.780 percent against 1.795 percent late on Thursday.

Data released in December showed that Japan's GDP contracted 1.0 percent in the July-September period from the previous quarter.

Japan's GDP for the fourth quarter of 1999 is expected to be released in March, but market players are looking ahead to the economy's growth prospects for this year to gauge the possibility of a BOJ credit-tightening.

JGBs fell early in the session in a knee-jerk reaction to comments by U.S. Federal Reserve Chairman Alan Greenspan, which sparked a sell-off in U.S. Treasuries, dealers said.

Greenspan said that a recent rise in market interest rates was "supported by a central bank intent on defusing the imbalances that would undermine the expansion".

The key 30-year Treasury bond stood at 92-30/32 yielding 6.675 percent, against 93-06/32 yielding 6.65 percent late in New York on Thursday. Dealers said there were still concerns that a forthcoming spate of JGB auctions could prove to be more than the market has an appetite for and spur rises in long-term JGB yields.

But they said the prevailing view was that the supply would, in the end, be absorbed without a drastic rise in interest rates.

"Traders think 10-year JGB yields will remain stuck between 1.6 percent and 1.9 percent. It is hard to imagine a rise above two percent without a further recovery in economic fundamentals," said a trader for a major Japanese insurance company.

The BOJ continued to drain the excess funds it had supplied to the money market ahead of Y2K, reducing the fund surplus in the money market to 7.4 trillion yen.-Reuters