JGBs steady ahead of 40-year bonds auction, likely to follow crude oil prices

The Japanese government bonds traded nearly flat on Thursday, succumbing to thin trading activity during a relatively quiet session that saw little data of much significance. Moreover, future course in bond prices are 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, remained unchanged at -0.097 percent and the yield on short-term 2-year bonds hovered at -0.226 percent by 0555 GMT.

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, crude oil prices crossed $50 mark for first time in seven months after the U.S. government reported a larger-than-expected drop in crude inventories. According to the US DOE, crude inventories decreased 4.2 million barrels, as compared to a build of +1.3 million barrels seen prior for the week ending 20 May. This came alongside an increase seen in gasoline inventories of +2.0 million barrels, from a draw of -2.5 million barrels seen prior and a decrease in distillate inventories of -1.3 million barrels, against a draw of -3.2 million barrels. The International benchmark Brent futures rose 0.70 pct to $50.09 and West Texas Intermediate (WTI) jumped 0.69 pct to $49.90 by 0500 GMT.

Today, the BoJ is not expected to buy JGBs under its massive JGB purchase program, as the MoF conducts a bimonthly JPY 400 billion 40-year JGB auction. Moreover, 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.

The markets will now focus on G7 meeting to be held in Japan on May 26-27, April National CPI on Thursday (2330 GMT) and BoJ’s own core CPI figure on Friday (0500 GMT). Meanwhile, the benchmark Nikkei 225 index was closed up 0.09 percent at 16,772.46, and the broader Topix index closed flat at 1,342.87 points.