JGBs flat in thin trade, crude oil in focus

The Japanese government bonds traded nearly flat on Monday, succumbing to thin trading activity as it is widely expected that the BoJ did not offer to buy JGBs under its massive JGB purchase program. Moreover, bond prices are likely to be ruled by the movements in the crude oil market. The yield on the benchmark 10-year bonds, which moves inversely to its price stood unchanged at -0.104 pct, yield on 30-years bonds rose 1bp to 0.363 pct, yield on 40-year bonds rose 1bp to 0.377 pct and the yield on 2-year bonds remained steady at -0.245 pct by 0620 GMT.

Last week, the Bank of Japan Governor Kuroda said that he expects the effects of negative rates to spread to the economy and prices, but some time is needed for this effect. Said recovery in exports has paused due to slowdown in overseas economies and risks to the outlook are tilted to the downside. He further added that the BOJ will continue to carefully examine risks, won't hesitate taking additional easing steps if needed and pace in improvement in corporate profits is slowing. The QQE with negative rate is extremely powerful policy scheme and the BOJ will carefully consider how best to make best use of QQE with negative rates, will act decisively as we move on to hit 2 pct target, he added.

In addition, investors did not react to the weak PPI figure, which declined 0.3 pct m/m in April, market consensus 0.2 pct rise, from down 0.1 pct. Similarly, it fell 4.2 pct y/y (consensus was for -3.7 pct) from -3.8% in March. 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, the crude oil prices jumped more than 1 pct after long-time bear Goldman Sachs said the market had ended almost 2-years of oversupply following global oil disruptions and flipped to a deficit. Reuters in its recent report said that supply disruptions from Nigeria, Venezuela, the United States and China triggered a U-turn in the oil outlook of Goldman Sachs, which long warned of overflowing storage and another looming crash in prices. Venezuela's oil production has already fallen by at least 188,000 bpd since the start of the year as PDVSA struggles to make the investment needed to keep output steady. In the United States, crude production has fallen to 8.8 million bpd, 8.4 percent below 2015 peaks as the sector suffers a wave of bankruptcies. And in China, output fell 5.6 percent to 4.04 million bpd in April, compared with the same time last year. The International benchmark Brent futures rose 1.40 pct to $48.49 and West Texas Intermediate (WTI) jumped 1.34 pct to $46.83 by 0620 GMT.

The investors will pay close attention to the next weeks Q1 GDP figure. The Cabinet Office will announce Q1 GDP data on Wednesday, 18th May (2350 GMT). The Japanese 2016 Q1 GDP is expected to increase 0.2 pct annualized, from down 1.1 pct in the previous quarter of 2015. Individually, Q1 private consumption, which accounts nearly 60 pct of the GDP is anticipated to increase 0.2 pct, after 0.9 pct decline in the last quarter. On the other hand, capital spending is likely to decline 0.8 pct, after rising 1.5 pct in Q4 of 2015 and external demand is expected to remain unchanged at 0.1 pct.

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, the Nikkei 225 index closed up 0.33 pct at 16,466.40, the broader Topix index closed higher 0.11 pct to 1,321.65 points.