Japanese government bonds held firm on Tuesday, with the market underpinned by a retreat in Tokyo shares but little inclined to move ahead of the release of second-quarter GDP data on Wednesday.

The Nikkei average <.N225> slipped 0.4 percent as profit-taking emerged after it advanced to three-week highs on Monday but it was not enough to push down the benchmark 10-year JGB yield, which is hovering just above four-month low.

The 10-year yield <JP10YTN=JBTC> edged up half a basis point to 1.460 percent. September 10-year futures <2JGBv1> slipped 0.09 point to 137.59.

But while 10-year yields were range-bound, concerns over the economy continued to guide superlong yields lower. The curve flattened on Monday as 20- and 30-year yields edged down to new four-month lows, albeit in subdued trading.

“The flattening of the yield curve reflects the deterioration in economic prospects,” said Hajime Takata, chief strategist at Mizuho Securities.

The 20-year yield <JP20YTN=JBTC> fell 1 basis point to 2.055 percent, while the 30-year yield <JP30YTN=JBTC> dropped 2.5 basis points to 2.245 percent.

Market watchers also said investors were picking up superlong JGBs as they were relatively less volatile with market movements subdued during Japan’s “obon” summer holiday period.

JGB yields across the curve declined this week to levels not seen since April on concern over the strength of the Japanese economy, and on ebbing expectations of a rate hike by the Bank of Japan as lower oil prices sooth inflation fears.

Money market futures suggest investors do not see a rate hike within the year, although the futures also suggest investors are not expecting a rate cut either <JPONIBOJ=TRDT>.

Government data released on Tuesday showed Japan’s wholesale prices jumped in July by the highest pace in 27 years. But market reaction was muted, with analysts saying the central bank is seen to more worried about the economy slumping than about inflation.

Japan’s wholesale prices climbed 7.1 percent in July from a year earlier, well above the expected 5.8 percent increase.

For the latest gauge of the Japanese economy’s health, investors are eyeing April-June GDP, to be released on Wednesday. The market is forecasting a 0.6 percent contraction by the economy in the second quarter, which would end three straight quarters of expansion.

The GDP release comes at a time when analysts say JGBs may need fresh incentives to advance significantly further.

“Downward pressure on yields that has accompanied fading rate hike expectations on lower oil prices appears to be reaching its limit,” Chotaro Morita, chief fixed-income strategist at Barclays Capital, wrote in a note.

Source: http://www.afxnews.com

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