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JGBs edge higher, trade quiet before 6-yr auction

TOKYO: Japanese government bond (JGB) futures closed slightly firmer in Tokyo on Monday as dealers squared positions ahead of a closely-watched six-year JGB auction on Tuesday.

Activity was subdued, with the key March 10-year JGB futures contract trading in a narrow range slightly below last week's close for most of the day.

But the contract moved higher after a 2.2 percent fall in machinery orders data for November induced short-covering by dealers who had expected a positive figure, dealers said.

March JGB futures ended at the intraday high of 132.40, compared with 132.37 at Friday's close.

Traders said regional investors appeared keen to buy the 500 billion yen-worth of six-year JGBs to be offered, but whether Tokyo-based investors would also bid aggressively remained uncertain.

Firmness in the intermediate zone of the yield curve in recent days pointed towards a relatively healthy auction, they said.

At the year's first central bank Policy Board meeting on Monday, members agreed to leave current monetary policy unchanged by majority vote. The move had been widely expected in the market.

Earlier in the afternoon March JGBs had recovered after core machinery orders for November fell 2.2 percent month-on-month against a median forecast of a 2.8 percent drop in a Reuters' poll of nine economists. Forecasts ranged from minus 8.2 percent to plus 1.0 percent.

"Some players may have refrained from selling further, thinking the figures were not that strong," a city bank dealer said.

Weak data would be positive for bonds as it would mean the BOJ is likely to maintain its zero interest rate policy for a while until signs of a recovery become clearer.

But an Economic Planning Agency (EPA) official said the data came in stronger than the agency had expected.

The bond market reacted coolly to a rally in Tokyo share prices, with the Nikkei average closing at a 2-year high, up 480.68 points or 2.54 percent at 19,437.23.

"High open interest in JGB futures has been putting short-covering pressure on the market, and it's been difficult to sell large amounts," said the city bank dealer.

Since the start of this year the BOJ has been gradually absorbing the excess liquidity it injected into the market late last year amid concerns over Y2K-related problems.

Separately, an auction of 600 billion yen in three-month Treasury bills on Monday produced a lowest price of 99.973 with 87.0010 percent of the bids accepted at that price.

Japan's Deposit Insurance Corp also on Monday set the terms for the sale of four-year government-guaranteed bonds.

It said the subscription price for 100 billion yen worth of 0.8 percent four-year bonds stood at 99.96 yen, with a subscription yield of 0.810 percent.-Reuters