Japanese government bond futures hit a four-month high on Monday as some market players rushed to cover short positions, with moves exaggerated by thin trading volume.

JGBs slipped in early trade as a fall in U.S. Treasuries late last week and a stock market rally prompted investors to trim holdings of government debt.

But bond futures suddenly jumped in mid-morning, boosted by technical trading as those who had bet JGBs would drop sharply decided to square short positions after the debt market showed some resilience.

Traders said the announcement of the Bank of Japan’s “rinban” operation to buy JGBs outright also prompted buying back of JGBs.

“There was no fundamental factor behind the rally in JGBs,” said a senior trader at a European brokerage. “It was just that someone bought back bond futures for a technical reason and that also sparked buying in the cash market.”

Traders said light volume illustrated how easily the market was being moved.

September futures climbed to a four-month high of 138.39 before ending the morning session at 138.21 <2JGBv1>, up 0.52 point on the day. The lead contract fell as low as 137.38 in early trade.

The benchmark 10-year yield fell 3.5 basis points to a four-month low of 1.405 percent <JP10YTN=JBTC>, after rising as high as 1.465 percent earlier in the day.

The five-year yield was down 3 basis points at 0.985 percent <JP5YTN=JBTC>.

But the two-year yield was unchanged on the day at 0.685 percent <JP2YTN=JBTC>, following reports the government will unveil a stimulus package worth around 8 trillion yen to support the economy against the effects of higher living expenses and costs for businesses. [ID:nT334315]

Longer-dated bonds underperformed the rest of the market as investors sold them to make room in their portfolios before the Ministry of Finance’s 20-year debt auction on Tuesday.

The 20-year yield edged up 0.5 basis point to 2.115 percent <JP20YTN=JBTC>. The yield curve steepened as a result.

The market awaited comments from BOJ Governor Masaaki Shirakawa, who is scheduled to speak later in the day.

But analysts expect his comments to be largely in line with remarks the BOJ made after its Aug. 18-19 policy meeting, at which the central bank left interest rates unchanged at 0.5 percent.

The BOJ said last week that economic growth had been sluggish due to weaker growth in exports as well as high energy and raw material prices. But it stuck to the view that the economy would eventually return to moderate growth.

“Shirakawa’s comments are not expected to surprise the market,” said Tetsuya Miura, a bond strategist at Shinko Securities. “Given the BOJ’s view on the economy last week, he is highly unlikely to say anything that hurts JGBs.”

JGBs have been firm for the past month, supported by expectations that a global slowdown would hurt the Japanese economy, prompting the BOJ to stand pat on rates for some time.

The Nikkei average <.N225> jumped 1.8 percent by midday.[.T]

U.S. Treasuries fell on Friday as a surging stock market unwound the bid for safe-haven government bonds and traders cut prices ahead of supply. [US/]

Source: http://www.afxnews.com

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