Japanese bonds flat ahead of 30-year bond sale

The Japanese government bonds were trading nearly flat Wednesday as investors await upcoming 30-year debt auction due on Thursday. Moreover, 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 fell 1bps to -0.091 pct and the yield on the 2-year bonds stood unchanged at -0.243 pct 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, the crude oil prices dipped as Canadian oil sand production was expected to gradually ramp up following forced closures due to wildfires, and as record crude inventories especially in the United States put pressure on markets. Industry group American Petroleum Institute (API) said on Tuesday that U.S. crude inventories rose by 3.45 million barrels to a record 543.1 million barrels during the week ended May 6. The International benchmark Brent futures fell 0.40 pct to $45.35 and West Texas Intermediate (WTI) tumbled 0.47 pct to $ 44.45 by 0600 GMT.

The investors will pay close attention to the Friday’s Bank of Japan Governor Kuroda speech in an attempt to estimate the BoJ's likely next step to lower interest rate. In addition, the Cabinet Office will announce Q1 GDP data on Wednesday, 18th May (2350 GMT). The Japanese 2016 Q1 GDP is expected to increase 0.2 pct annualized, from down 1.1 pct in the previous quarter of 2015. Individually, Q1 private consumption, which accounts nearly 60 pct of the GDP is anticipated to increase 0.2 pct, after 0.9 pct decline in the last quarter. On the other hand, capital spending is likely to decline 0.8 pct, after rising 1.5 pct in Q4 of 2015 and external demand is expected to remain unchanged at 0.1 pct.

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, the Nikkei 225 index closed up 0.08 pct at 16,579.01, the broader Topix index closed down 0.04 pct to 1,334.30 points.