JGBs rise modestly on strong demand for 10-year auction; likely to remain volatile ahead of U.S. election result

The Japanese government bonds traded modestly firmer Tuesday following strong demand from investors at the 10-year debt auction. Also, we expect debt prices to remain volatile ahead of the United States 2016 presidential election result.

The benchmark 10-year bond yield, which moves inversely to its price, fell 1 basis point to -0.062 percent by 06:30 GMT.

Treasury prices are likely to remain highly volatile ahead of the United States’ presidential election scheduled for Tuesday, November 8, 2016. We suggest that investors should retain their positions until the election result is revealed and also avoid creating any new positions.

Moreover, the Bank of Japan kept its benchmark interest rate on hold at the 2-day monetary policy meeting concluded last Tuesday, extending the time limit for achieving its long-drawn inflation target of around 2 percent. This followed the last month’s major overhaul that saw policymakers shift the focus from quantitative easing to interest rate targeting.

The unchanged policy decision was made by a majority 7-2 vote, holding the interest rate at -0.1 percent, since January this year, pledging to maintain the 10-year JGB yield target at around zero percent, with holdings rising at an annual pace of around 80 trillion yen.

In a quarterly review of its forecasts, the BoJ cut its inflation forecasts for the next fiscal year ending in March 2018 to 1.5 percent from 1.7 percent in July. Meanwhile, Japan's economy expanded for the second straight quarter in April-June but many expect growth to remain modest for the rest of this year, with exports and output weak on sluggish global demand.

Meanwhile, the benchmark Nikkei 225 closes up 0.02 percent at 17,181.50 and the broader Topix index closed 0.05 percent higher to 1,363.49 points.