JGB yields inch lower on thin trading activity, declining oil prices

The Japanese long–term bonds remain modestly firmer on Tuesday amid extremely thin trading activity from investors and declining oil prices due to profit taking. The yield on the benchmark 10-year Treasury note which moves inversely to its price, moved down 10.13 pct to -0.087 pct and the yield on the 3-year Treasury bond dipped 0.84 pct to 0.240 pct by 0640 GMT.

Crude oil prices also lost ground early Tuesday as traders took profit following the overnight surge, underscoring the growing mixed views that key oil producers could agree on a production freeze this Sunday. The International benchmark Brent futures fell 0.49 pct to $42.63 and West Texas Intermediate (WTI) tumbled 0.32 pct to $40.23 by 0650 GMT.

The JGB prices remain slightly higher in the 5-year and longer zone, with yields down 0.5 bps from yesterday's afternoon close. Also, bonds yield are unchanged from the morning close. The results of today's quarterly JPY400bn 10-year inflation-linked JGB auction were decent. The lowest accepted price came in at 104.90, as compared to 104.50-104.80 for median market expectations. The tender is conducted in a Dutch-style auction, giving all the winning bidders the same lowest price, regardless of their original bid price, though primary dealers have to place their bids in increments of 0.05 in price. The coupon rate has been set at the minimum level of 0.1% since October 2013.

Today, as widely expected, the BoJ did not offered to buy JGBs under its massive JGB purchase program, as the MoF conducted a quarterly 10-year CPI-linked JGB auction. The BoJ is to buy mid-term JGBs tomorrow and super-long JGBs on Friday under the program.

Moreover, 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.