JGBs slump on upbeat Q1 GDP, firm crude

The Japanese government bonds traded modestly lower on Wednesday after reading higher than expected first quarter GDP figure. Firmer crude oil prices also supported the cause and future bonds course is 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 rose 1bp to -0.098 pct, yield on 30-years bonds rose 2bps to 0.371 pct, yield on 40-year bonds climbed 1bp to 0.392 pct and the yield on 2-year bonds hovered at -0.241 pct by 0600 GMT.

Japan, the world’s third largest economy witnessed a jump in its Q1 growth figures, beating analysts’ expectations. This is expected to discourage the Bank of Japan Governor Kuroda to further pursue easing steps, to help revive the ailing economy. However, few believe that the rebound is not strong enough to generate hopes of revival of the crawling economy. The Japanese Q1 gross domestic product grew by 1.7 pct at an annualized seasonally adjusted rate, against market hopes of a nominal 0.3 pct and compared to -1.1 pct in the previous quarter. In line with this, non-annualized GDP (seasonally adjusted) grew 0.4 pct, against analysts’ expectations of 0.1% and -.04% compared to last quarter. Minutes after the GDP data was released, analysts have judged the high-than-expected figures as nominal, hoping the Kuroda-led central bank to ease policy in June, against a backdrop of poor economic conditions and weak inflation. We foresee that in light of the recent growth figures in the Eurozone, improving economic indicators in the US, and now better Japanese GDP, hopes of further BOJ easing have diminished.

"The Japanese economy will continue its trend to recover on a moderate path with rebound in consumption likely to be behindQ1 GDP figures," Reuters reported, citing Japan Economy Minister Shintaro Ishihara in a recent release.

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 rose after the American Petroleum Institute reported that U.S. crude supplies fell by 1.1 million barrels for the week ended May 13. 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 barrel per day (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 pct below 2015 peaks as the sector suffers a wave of bankruptcies. And in China, output fell 5.6 pct to 4.04 million bpd in April, compared with the same time last year. Meanwhile, the International benchmark Brent futures rose 0.32 pct to $49.44 and West Texas Intermediate (WTI) jumped 0.39 pct to $48.50 by 0540 GMT.

Yesterday, the Japan March industrial production increased 3.8 pct m/m, from 3.6 pct in February. On annual basis, it rose 0.2 pct y/y, as compared to prior 0.1 pct and capacity utilization jumped 3.2 pct, from down -5.4 pct in February.

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, Japanese equities had an indifferent day despite better GDP data, the benchmark Nikkei 225 index closed down -0.05 pct at 16,644.69, and the broader Topix index closed high 0.19 pct to 1,338.38 points.