JGBs sag following rout in global debt market; 10-year auction in focus

The Japanese government bonds slumped Wednesday, following the current rout in the global debt market. Also, better-than-expected manufacturing PMI drove-out investors from safe-haven buying.

The benchmark 10-year bond yield, which moves inversely to its price, rose 1-1/2 basis points to 0.06 percent, the long-term 30-year bond yields climbed nearly 2 basis points to 0.73 percent and the yield on short-term 3-year note bounced 1/2 basis point to -0.14 percent by 06:00 GMT.

The JGBs have been closely following developments in the U.S. debt market. The benchmark 10-year bond yields jumped 2 basis points to 2.47 percent after reading stronger manufacturing data.

The United States ISM manufacturing index rose to 54.7 in December, improving from the strong reading in November and above market consensus of 53.6. Most of the major subcomponents of the report pointed to continued expansion in manufacturing activity, data released by the Institute for Supply Management (ISM) showed Tuesday.

Moreover, Japan’s manufacturing PMI expanded to 52.4 in December, higher than the market expectations of 51.9, as compared to 51.9 in November. A reading above 50 signals an improvement, while one below 50 points to a contraction in activity.

The Bank of Japan in its December two-day monetary policy meeting’s summary of opinions mentioned that under the framework of yield curve control, the yield curve has been formed smoothly in a manner consistent with the guideline for market operations. The Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control has been functioning as intended thus far, and is contributing to economic recovery and price increases.

Additionally, the central bank should conduct market operations so that 10-year Japanese government bond (JGB) yields are kept at zero percent. The current situation presents a good opportunity to achieve the price stability target of 2 percent.

However, one of its members voted against keeping 10-year bond yields at zero percent and suggested to allow long-term interest rates to increase if such moves reflected improvements in the economy.

We foresee that bond prices will keep drifting between small gains and losses in quiet trading session. Also, trading activity to resume from the second week of January, 2017 as global market receives no more important data till then.

Lastly, the BoJ’s first two-day monetary policy meeting for 2017 will take place on January 30-31. We foresee that the central will remain committed to hold its 10-year JGB yields near zero, while keeping interest rate steady at -0.10 percent.

Meanwhile, the benchmark Nikkei 225 ended 2.51 percent higher 19,594.16. While at 06:00 GMT, the FxWirePro's Hourly Japanese Yen Strength Index remained highly bearish at -141.14 (lower than -75 represent a bearish trend).