Japanese Bonds Rise Modestly in Thin Trade

Japanese Bonds Rise Modestly in Thin Trade

6 May 2016, 09:04
Roberto Jacobs
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Japanese Bonds Rise Modestly in Thin Trade

The Japanese government bonds were trading modestly firmer on Friday, succumbing to thin trading activity as Japanese markets opens for first time since Monday after long vacation. Also, weak PMI figures and tumbling oil prices pushed investors towards safe assets. The yield on the benchmark 10-year bonds, which moves inversely to its price fell 1bps to -0.112 pct and the yield on the 2-year bonds dipped 1bps to -0.242 pct by 0445 GMT.

Japan April Nikkei service PMI declined to 49.3 (contracted in April at the fastest pace in two years), from 50.0 in March and composite PMI fell to 48.9 from 49.9 in March. The index for new business fell to 48.6, as compared to 49.4 in March, also the fastest contraction in two years. Moreover, the Japanese bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Bank of Japan's target. Today, crude oil prices tumbled overnight on profit booking and surging dollar that at least temporarily outweighed output after wildfire in Canada disrupted its oil sands production, while escalating fighting in Libya threatened the North African nation's output. The International benchmark Brent futures fell 0.80 pct to $44.65 and West Texas Intermediate (WTI) dipped 1.08 pct to $ 43.84 by 0445 GMT.

The BoJ's adoption of negative rates in January has driven JGB yields below zero, while also increasing its market volatility. Further, we expect an expansion of stimulus, and if the market happens to rule out any additional boost in stimulus, that would create an opportunity to go long and we also foresee that the 10-year note will yield about -0.15 pct at year-end. Meanwhile, Japan's Nikkei 225 index was down 0.83% at 16,013.65 on Friday morning in Tokyo, while the broader Topix index slipped 0.11% to 1,298.42 points.

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