JGBs narrowly mixed in thin trade, crude oil in focus

The Japanese government bonds were trading narrowly mixed on Friday as investors receive no more important data or events. Moreover, the BoJ is widely expected to buy JPY450 billion of JGBs in the 5-10 year zone, JPY240 billion of JGBs in the 10-25 year zone, and JPY160 billion of JGBs in the 25 year and longer zone, including the new 30s, under the massive JGBs purchase program. The yield on the benchmark 10-year bonds, which moves inversely to its price stood unchanged at -0.111 pct, yield on 30-years bonds rose 2bps to 0.341 pct, yield on 40-year bonds rose 1bp to 0.345 pct and the yield on 2-year bonds remained steady at -0.249 pct by 0610 GMT.

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% target, he added.

In addition, the Japan tertiary industry index declined 0.7 pct m/m in March, against market expectation of 0.1 pct fall, from down 0.1 pct in February. 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 fell in early trading on Friday as a stronger USD weighed and Russia warned that a global crude supply overhang could last into next year. In Canada, crude production outages from oil sand fields following forced closures due to wildfires still stood around 1 million bpd as of Wednesday, although operators said they were gradually ramping up output. The International benchmark Brent futures fell 0.52 pct to $47.82 and West Texas Intermediate (WTI) tumbled 0.86 pct to $46.30 by 0510 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 down 1.41 pct at 16,412.21, the broader Topix index closed lower 1.28 pct to 1,320.19 points.