TOKYO, July 12 (Reuters) – Japanese government bonds edged up on Monday, with the yield curve flattening as bargain hunting emerged in the superlong sector, with Tokyo’s Nikkei sagging as the political gridlock Japan faces after the ruling party’s drubbing in an election dimmed prospects for stocks.
The ruling Democratic Party of Japan (DPJ) and a small ally lost their majority in parliament’s upper house in Sunday’s election, falling short of their target and complicating efforts to get the economy in shape. [ID:nTOE66A02V]
“The bond market’s attention is on the negative implications the election outcome will have for stocks,” said a fund manager at a domestic investment firm.
“In addition to deflation, political uncertainty after the election is the biggest factor that would make foreign investors avoid Japanese stocks, which is favouring bonds like the superlongs.”
Prior to Sunday, the government’s loss of a majority in the upper house was widely expected to be negative for JGBs, as cutting back Japan’s huge public debt with the help of a consumption tax hike had been touted by Prime Minister Naoto Kan.
“The market appears to have priced in the government losing its majority beforehand, helped by selling done in preparation for last week’s debt auctions,” said Atsushi Ito, a fixed-income strategist at Morgan Stanley MUFG.
“But it still remains to be seen how the market digests policy implications going forward,” he said.
In focus is which smaller parties the DPJ might form alliances with, what policy compromises it makes, and whether that dilutes fiscal reform.
CURVE BULL FLATTENS
Market players said concerns about the Chinese economy — and in extension the global economy — losing momentum remained a factor capping debt yields despite the Japanese government’s election loss.
In particular focus was China’s second quarter GDP data due on Thursday.
September 10-year futures 2JGBv1 climbed 0.24 point to 141.45 after hitting a seven-year high of 141.95 at the start of July.
The yield curve bull flattened on the back of gains by superlongs, which were scooped up by investors, including life insurers, following the previous week’s spike in yields.
The five-year/20-year yield spread tightened by 2.5 basis points to 148 basis points, edging back towards a nine-month low of 143.5 basis points hit early in July.
The Bank of Japan’s outright JGB buying operation also lifted longer-dated maturities, traders said.
The 20-year yield JP20YTN=JBTC fell 5 basis points to 1.835 percent after climbing 11 basis points the previous week, its biggest weekly rise in a year.
The benchmark 10-year yield JP10YTN=JBTC dropped 4 basis points to 1.115 percent.
The five-year yield JP5YTN=JBTC dipped 1.5 basis points to 0.355 percent.
The Nikkei average .N225 fell 0.4 percent with policy deadlock in Japan expected to weigh on the market going forward. [.T] (Editing by Joseph Radford)