TOKYO (Thomson Financial) - Japanese government bonds closed higher on Wednesday after speculation of an interest rate hike by the Federal Reserve faded and newly released data reignited worries about the U.S. economy.
Fresh data showed U.S. industrial production continued to fall in May while capacity use at factories, mines and utilities fell to its lowest rate in almost three years.
Additionally, U.S. housing starts in May fell to their lowest level since 1991, while the producer price index for the month rose at its fastest pace since last November.
'Fading expectations of interest rate hikes in the U.S. and Europe, and (the result of the latest) bond auction led market participants such as banks to buy back bonds,' said Satoshi Yamada, general manager at Okasan Asset Management.
'It seems no one has a clear idea which direction the market is heading, and market volatility is high,' he said.
Fluctuations in the prices of medium-term bonds were especially sharp as they were more vulnerable to central banks' monetary policies, whereas movement in the prices of longer-noted bonds shows more susceptibility to the global economic slowdown, Yamada said.
The JGB market saw sharp losses last week on intensifying speculation about rate hikes in Europe and the U.S. after hawkish comments from European Central Bank and U.S. Fed officials.
But the Financial Times said in its online edition on Tuesday that market expectations for Fed rate hikes within the year do not seem to match the views within the Fed.
The Wall Street Journal's online edition also reported the Fed is likely to hold rates steady till around the fall 'unless the inflation outlook deteriorates considerably.'
Concern about a Fed rate hike later this year may have been excessive and media reports have now prompted the market to moderate their views on policy tightening. 'But there has been no change in as far as worries about the U.S. economy and inflation' are concerned, said Katsutoshi Inadome, a strategist at Mitsubishi UFJ Securities.
Meanwhile, a member of the Bank of Japan's policy board said the recent rise in commodity prices had caused 'both supply and demand shocks' to the Japanese economy, making it difficult for the central bank to decide on which policy action to take, according to minutes of the BoJ's May 19-20 meeting released on Wednesday.
The BoJ kept its overnight call rate target unchanged at 0.5 percent at its last two meetings on May 19 and 20, and on June 12 and 13.
The yield on the benchmark 10-year bond closed down 1.775 percent from 1.835 percent late on Tuesday.
The yield on the two-year note fell to 0.875 percent from 0.915 percent, while the yield on the five-year note was at 1.350 percent, down from 1.425 percent.
The yield on the 20-year bond declined to 2.355 percent from 2.405 percent, and the yield on the 30-year bond dipped to 2.575 percent from 2.605 percent.
Bond prices move inversely to yields.
The price of the September futures contract for the 10-year bond climbed to 133.64 yen from 133.15 yen late on Tuesday.
($1 = 108.06 yen)
kaori.kaneko@thomsonreuters.com . kk/nt/nt COPYRIGHT Copyright Thomson Financial News Limited 2008. All rights reserved. The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.
© 2008 AFX News
