Japanese government bonds fell on Monday as Tokyo shares rose and U.S. Treasuries tumbled late last week on the U.S. government’s steps to help end the credit crisis.

But losses in JGBs were limited as yields have risen to levels appealing enough for many investors who don’t expect the Bank of Japan to raise interest rates anytime soon, analysts said.

There were also doubts about how effective the U.S. steps, which include taking massive amounts of illiquid mortgage assets off banks’ books, would be in resolving the long credit crisis and what impact they would have on the U.S. economy, they said.

JGB market players were also reluctant to take big positions before a holiday. Japanese financial markets will be closed on Tuesday for a national holiday.

“JGB players are undecided,” said Mari Iwashita, a senior market economist at Daiwa Securities SMBC.

“On the one hand they feel the worst of the credit crisis may be over, but on the other hand they are not confident if they can fully bet on the unwinding of safety bids,” she said.

Iwashita said there are still uncertainties over details as to how the credit crisis will be resolved under the U.S. government’s plans and how that would affect the recovery of the U.S. economy.

U.S. lawmakers are likely to pass a bill by the weekend. The Bush administration and Congress on Sunday ramped up talks on an unprecedented $700 billion bank bailout as they battled the clock to prevent further financial market turmoil that risks hurtling the economy into a deep and damaging recession.

December 10-year JGB futures fell as much as 0.41 point to 136.61 earlier in the day before recovering to 136.84, down 0.18 point. Futures had hit a 5- month peak of 140.35 last week, when JGBs soared on safe-haven buying in the collapse of investment bank Lehman Brothers.

The benchmark 10-year yield rose 1.5 basis points to 1.495 percent.

Five-year yields eased 0.5 basis point to 1.110 percent, off a two-month high of 1.155 percent hit on Friday. Two-year yields edged up 0.5 basis point to 0.790 percent, off a two-month high of 0.825 percent hit on Friday.

The Nikkei stock average was up 2 percent.

Counterparties of failed Lehman were left seeking JGBs or cash they did not receive from Lehman. Heightening counterparty risk prompted investors to set aside ample cash, especially ahead of the end of the fiscal first half on Sept. 30, leading to some selling of JGBs for cash, traders said.

More JGB settlements were due on Monday including five- and 10-year bonds, making players wary of taking huge positions.

“While concerns remain about the settlements, players had some time to prepare for the risk of failed delivery, and many appear to have already taken care of it,” said Akihiko Inoue, a market analyst at Mizuho Investors Securities.

“JGB futures remain relatively pricy compared to cash bonds, and cash bond yields are now in a comfortable zone for investors,” he said, referring to 10-year yields around 1.5 percent, five-year yields around 1.1 percent and two-year yields above 0.75 percent.

To ease continuing strains in the money market, the BOJ injected 1.5 trillion yen ($13.96 billion) into the money market via a same-day operation.

($1=107.42 Yen)

Source: http://www.afxnews.com

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