JGBs nearly flat in subdued trade, long-term JGBs hit record low after Brexit vote

The Japanese short-term government bonds traded nearly flat on Monday, succumbing to thin trading activity during a relatively quiet session that saw little data of much significance. On the other hand, long-dated bond yields fell to record low after UK voted in favour of Brexit.

The yield on the benchmark 10-year bonds, which moves inversely to its price hovered around -0.20 percent mark, short-term 2-year JGB yield remained steady at -0.27 percent, super-long 40-year bonds dipped 5 basis points to 0.129 percent and the yield on 30-year JGB tumbled 3-1/2 basis points to 0.101 percent by 07:15 GMT.

On Friday, just over 72 percent of the UK population, the highest participation rate in a country-wide poll since 1992 have participated in a historic referendum to abandon the EU project for good, highly legitimising the 51.9 percent vs 48.1 percent in favour of leaving, result. This outcome flies in the face of the high implied probabilities, based on bookie’s betting odds, of staying in, is at odds with several of the final (pre-referendum) opinion poll findings, and indeed goes against the grain of the number of self-confessed EU-sceptics who are said to have reluctantly moved towards the ‘Stay’ camp.

Although the UK physical departure from the EU will not occur for at least a few years -  article 50 of the Lisbon Treaty must first be invoked - domestically, the UK faces a very uncertain l-t economic future, and a sea-change in the political landscape. PM Cameron is to step down within three months and is likely to take along with him, Chancellor Osborne. The face of the next Conservative ‘administration’ that will be responsible for negotiating the country’s divorce and orderly exit terms from the EU will be altered, as the centre of gravity of the Tory government moves decisively further to the right.

Moreover, we foresee that the UK’s relationship with ex-EU partners will be significantly altered. Beyond that, in view of Scotland’s 62 percent vote in favour of remaining in the EU, the SNP will offer another referendum on independence to Scotland, on the basis of Scotland having been yanked out of the EU against the will of its people. We see next time around the Scottish people will likely vote in favour of secession.

The Japanese Prime Minister Abe said that some uncertainty remains in the markets and Finance Minister Aso should take necessary steps in the forex market. Said the MoF to watch markets closely, work with Bank of Japan. He further mentioned that it is important for G7 to continue to send messages to stabilise markets.

Similarly, Japan’s Finance Minister Aso said that Abe has asked for various measures to stabilise markets. Said he was instructed by Abe to take various, aggressive responses to financial and forex markets.

In addition, the Bank of Japan Deputy Governor Nakaso said that the Prime minister has issued instructions to ensure liquidity and the PM has said to provide funds to support the financial system and to work with other central banks to ensure liquidity.

Lastly, 

Japan's Deputy Chief Cabinet Secretary Seko said that the government and the Bank of Japan will hold more meetings if needed and closely watch short-term market moves by taking all possible steps to ensure market stability. Said expect Brexit impact will appear in real economy in medium to long term will consider size and timing of economic stimulus package.

The benchmark Nikkei 225 index closed up +2.39 percent at 15,309.21, and the broader Topix index closed higher 1.77 percent to 1,225.76 points.