TOKYO, Aug 28 (Reuters) - Japanese government bond futures edged up on Thursday, crawling towards a four-month high struck earlier this week as investors took their cue from an overnight rise in U.S. Treasuries.
But gains were limited since investors feared futures had risen too sharply, while Bank of Japan board member Miyako Suda said the central bank should raise rates once it is confident of the economy's health.
Her remarks triggered light selling.
Suda said any future decision to raise rates should be made early to avoid a rapid rise later on.
JGBs have climbed on mounting signs the U.S. downturn is taking a toll on Japan and the global economy, convincing investors the BOJ is unlikely to change interest rates from the current 0.5 percent for several months.
In addition, foreign investor buying has pushed futures to levels deemed excessively high compared with medium-term JGB yields, analysts and traders have said.
Investors are now waiting for further signs of economic or financial sector distress before buying JGBs aggressively.
'The market continues to look overheated,' said Chotaro Morita, chief fixed-income strategist at Barclays Capital.
But he said technical factors alone would not be enough to trigger a bond sell-off.
The Japanese government is expected to outline an economic relief package this week, which could weigh on the bond market. More government bonds may be issued to fund the spending.
September 10-year futures rose 0.17 point to 138.25. During Tuesday's after-hours trade, the lead futures contract rose as high as 138.80 <1JGBv1>, its highest since April.
Futures have soared more than 3 points in the past month, leading led to some anomalies in the market.
Seven-year JGB yields, which are used for delivering cash bonds in futures contracts, matched five-year yields this week in what some market players said was a signal that the futures-led rally may be nearing an end.
Both five-year and seven-year yields were at 0.990 percent.
The benchmark 10-year yield fell 2.5 basis points to 1.415 percent, staying near a four-month low of 1.405 percent hit on Monday.
The two-year yield edged down 0.5 basis point to 0.705 precent after the auction drew the best demand in a year, highlighting market expectations the BOJ is not going to be lifting interest rates for a while.
The Ministry of Finance's 1.7 trillion yen ($15.5 billion) offer drew 3.85 times the amount sold.
The comments from Suda reinforced expectations that the BOJ is likely to raise rather than cut rates at some point. Suda also said the central bank should not lower its guard on inflationary risks.
'Suda's comments gave the impression that she has not changed her hawkish stance,' said Katsutoshi Inadome, fixed-income strategist at Mitsubishi UFJ Securities.
U.S. Treasuries rose on Wednesday in a return to safe-haven buying after the Treasury shot down rumours that an announcement was imminent regarding troubled mortgage finance companies Fannie Mae <FNM.N> and Freddie Mac. After the close, however, Fannie Mae announced a management reshuffle.
(Additional reporting by Eric Burroughs; editing by Sophie Hardach)
((rika.otsuka@thomsonreuters.com; +81-3-6441-1874; Reuters Messaging: rika.otsuka.reuters.com@reuters.net))
($1=109.52 Yen)
. 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.
But gains were limited since investors feared futures had risen too sharply, while Bank of Japan board member Miyako Suda said the central bank should raise rates once it is confident of the economy's health.
Her remarks triggered light selling.
Suda said any future decision to raise rates should be made early to avoid a rapid rise later on.
JGBs have climbed on mounting signs the U.S. downturn is taking a toll on Japan and the global economy, convincing investors the BOJ is unlikely to change interest rates from the current 0.5 percent for several months.
In addition, foreign investor buying has pushed futures to levels deemed excessively high compared with medium-term JGB yields, analysts and traders have said.
Investors are now waiting for further signs of economic or financial sector distress before buying JGBs aggressively.
'The market continues to look overheated,' said Chotaro Morita, chief fixed-income strategist at Barclays Capital.
But he said technical factors alone would not be enough to trigger a bond sell-off.
The Japanese government is expected to outline an economic relief package this week, which could weigh on the bond market. More government bonds may be issued to fund the spending.
September 10-year futures rose 0.17 point to 138.25. During Tuesday's after-hours trade, the lead futures contract rose as high as 138.80 <1JGBv1>, its highest since April.
Futures have soared more than 3 points in the past month, leading led to some anomalies in the market.
Seven-year JGB yields, which are used for delivering cash bonds in futures contracts, matched five-year yields this week in what some market players said was a signal that the futures-led rally may be nearing an end.
Both five-year and seven-year yields were at 0.990 percent.
The benchmark 10-year yield fell 2.5 basis points to 1.415 percent, staying near a four-month low of 1.405 percent hit on Monday.
The two-year yield edged down 0.5 basis point to 0.705 precent after the auction drew the best demand in a year, highlighting market expectations the BOJ is not going to be lifting interest rates for a while.
The Ministry of Finance's 1.7 trillion yen ($15.5 billion) offer drew 3.85 times the amount sold.
The comments from Suda reinforced expectations that the BOJ is likely to raise rather than cut rates at some point. Suda also said the central bank should not lower its guard on inflationary risks.
'Suda's comments gave the impression that she has not changed her hawkish stance,' said Katsutoshi Inadome, fixed-income strategist at Mitsubishi UFJ Securities.
U.S. Treasuries rose on Wednesday in a return to safe-haven buying after the Treasury shot down rumours that an announcement was imminent regarding troubled mortgage finance companies Fannie Mae <FNM.N> and Freddie Mac. After the close, however, Fannie Mae announced a management reshuffle.
(Additional reporting by Eric Burroughs; editing by Sophie Hardach)
((rika.otsuka@thomsonreuters.com; +81-3-6441-1874; Reuters Messaging: rika.otsuka.reuters.com@reuters.net))
($1=109.52 Yen)
. 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
