Long-term JGBs slump as investors’ risk sentiment improves

The Japanese long-term bonds plunged Monday as risk appetites were strengthened after the latest polls showed that the ‘Remain’ camp gained a narrow lead. Also rallying crude oil prices and firm equities drove-out investors from buying safe-haven assets.

The yield on the benchmark 10-year bonds, which moves inversely to its price hovered around -1.14 percent, yield on super-long 40-year bonds jumped more than 4 basis points to 0.309 percent, yield on 15-year bonds climbed 1 basis point to 0.023 percent and the 30-year JGB yield bounded more than 3 basis point to 0.268 percent by 06:45 GMT.

A recent opinion poll showed that British voters have swung and now started to favour remaining in the European Union. A YouGov poll for The Sunday Times newspaper published at the weekend showed 44 percent supported remaining in the EU, as compared to 43 percent who supported leaving, based on interviews conducted on Thursday and Friday. Two other polls also showed public opinion tilted towards the 'Remain' camp after the killing of a UK politician Jo Cox on last Thursday.

Also, the final European Union referendum phone poll by BMG Research showed Bremain at 53.3 percent vs Brexit on 46.7 percent. On the other hand, including the ‘undecided’, vote for Remain stood at 46 percent vs Leave 43 percent and undecided 11 percent. The online poll has Leave 55 percent Remain compared to Leave 45 percent.

In addition, a British member of parliament, Jo Cox, was shot dead on last Thursday, resulting in the suspension of campaigning for this week’s referendum on the country's EU membership. Cox was one of the members of parliament advocating continued British membership.

On the other hand, investors did not react to the weak Japanese trade balance for May, which fell to -40.7 billion yen, higher than the consensus was for 70 billion yen, as compared to 823.2 billion yen in April. Adjusted trade balance for May declined to 269.8 billion yen, against markets expectation of 113.4 billion yen, from previous 426.6 billion yen.

Additionally, the exports fell 11.3 percent y/y, the fastest fall since January this year, markets expectation was for -10 percent fall, from -10.1 percent in April. Further, imports fell 13.8 percent y/y against market expectation of -13.8 percent y/y, from -23.3 billion yen in April.

On Thursday, the Bank of Japan left its key policy rate unchanged at -0.1 percent and also chosen not to expand its quantitative and qualitative easing programme beyond its current level of buying 80 trillion yen assets a year.

This policy decision on negative interest rate was made by 7-2 votes and on debt buying by 8-1 votes. On the contrary, board member Takahide Kiuchi and Takehiro Sato voted against keeping the policy rate in negative territory and Takahide Kiuchi also proposed tapering annual JGB purchases to 45 trillion yen, which was turned down by a majority vote.

The Central Bank said in its monetary statement that Japan's economy continues to recover moderately as a trend, while keeping assessment unchanged from April. They further added that CPI likely to be slightly negative or about 0 percent for time being due to weak energy prices. But the central bank stuck to its long-term forecast that inflation will accelerate toward 2 percent after some weakness, and left its relatively optimistic assessment of Japan’s economy unchanged as well.

Moreover, the JGBs 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 jumped more than 1 percent due to weaker US dollar and easing fears of a UK exit from the European Union. The International benchmark Brent futures rose 1.36 percent to $49.82 and West Texas Intermediate (WTI) climbed 1.08 percent to $48.50 by 06:50 GMT.

Meanwhile, the benchmark Nikkei 225 index closed up +2.34 percent at 15,965.30, and the broader Topix index closed higher 2.27 percent to 1,279.19 points.