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JGBs edge up, erase early losses as Nikkei slumps

TOKYO: Japanese government bond futures ended the Tokyo session firmer and near the day's high on Thursday after late rounds of short-covering spurred by a steep drop in domestic share prices, traders said.

"JGB futures managed to come back after the Nikkei weakened further in the afternoon. Relatively steady bids led by dealers in the futures market boosted the overall trend in JGBs," a Japanese trust bank trader said.

The key Nikkei index dropped 2.02 percent or 374.28 points to close at 18,168.27.

Overall sentiment in the stock market was depressed, especially after comments at midday by Sony Corp President Nobuyuki Idei, who told Reuters that the company's appropriate stock price was around 20,000 yen, well below current levels, and that he welcomed a correction in the U.S. and Japanese share markets.

March 10-year JGB futures ended at 132.64, near the intraday high of 132.66 and up from Wednesday's close at 132.45. March JGBs dropped as low as 132.09 on Thursday morning.

At 0605 GMT, the yield on the 218th 10-year cash JGB stood at 1.700 percent, up 0.005 from the previous close.

Despite the afternoon bounce, the market was a bit cautious about chasing JGBs higher ahead of a slew of government bond auctions scheduled for next week.

Such wariness kept the cash JGB market extremely dull throughout the day, traders said.

The auctions kick off next Wednesday, when the Finance Ministry is set to offer 1.4 trillion yen worth of 10-year JGBs. Traders expect the coupon for the 10-year JGB auction to be set at 1.7 percent if current market conditions persist until next Wednesday.

"Wednesday's auction should give a pretty good idea of how the rest of the auctions (in January) turn out," a Japanese brokerage analyst said.

"I don't think the market is overly worried about the scale of the auctions planned in January. The expectation is that investors will have plenty of funds to park in the JGB market now that Y2K concerns are out of the way," the analyst said.

In early trade the market was depressed by a drop in U.S. Treasuries and a rebound in the Dow Jones industrial average .DJI overnight, and by a strengthening of the dollar against the yen.

Although the market had shrugged off the weakness in U.S. Treasuries by the afternoon, Tokyo JGB market participants will continue to pay close attention to movements in the U.S. bond market, traders said.

"It's fair to say the Treasury market has driven the JGB market in recent sessions, so players are aware that Treasuries could shake up the underlying trend in the JGB market," the trust bank trader said.

In the short end of the market, the key September TIBOR-based euroyen futures contract ended the regular session at 99.590, down from Wednesday's day-session settlement of 99.600.

Three-month certificates of deposit were issued at 0.06 percent. They were offered at 0.04 percent on Wednesday.

The Bank of Japan continued to drain excess liquidity from the money market, reducing the daily projected net surplus to 19.8 trillion yen .

The key unsecured overnight call rate was mainly traded at 0.02 percent late in the afternoon, unchanged from the weighted average on Wednesday.

The Ministry of Finance said an auction of 2.2 trillion yen in six-month "tankoku" Treasury bills on Thursday produced a lowest accepted price of 99.925, with 84.8883 percent of the bids accepted at that price.-Reuters