TOKYO, March 26 The benchmark 10-year Japanese government bond yield fell to a fresh three-year low while futures rose by more than a half point on Wednesday as players continue dealing with fallout from the credit turmoil.
The global credit market crisis had sparked a massive unwinding of market bets that went sour, leading to sharp swings in JGB futures over the past few weeks.
Futures had surged to a five-year high as foreign players and hedge funds unwound bad bets on a flattening yield curve and in asset swaps, only to tumble 2 points in just a few days. Some analysts said the retreat may have gone too far, encouraging Wednesday's buying.
Financial markets have regained some stability following aggressive steps by the Federal Reserve to calm global credit markets and prevent the U.S. economy from deteriorating sharply, but concerns remained about the U.S. and Japanese economic outlook, analysts said.
The recent decline in oil and commodity prices also fuelled speculation of weakening growth in emerging economies, which has helped offset slowing U.S. growth.
Data showed Japan's trade surplus rose 0.9 percent in February from a year earlier to 970.0 billion yen ($9.71 billion), below an 18.1 percent rise forecast, underscoring the view that solid shipments of Japanese goods to emerging economies offset slowing exports to the United States. [JPTBAL=ECI]
"The rise in JGBs this session may be attributed to various factors, including ongoing unwinding of bad bets, an appetite for flight-to-quality and rising concerns about the Japanese economy which keep alive expectations the BOJ will keep rates low," said Akihiko Yokoyama, chief JGB strategist at JPMorgan Securities.
"While the credit market troubles may have peaked, the U.S. economy will likely languish for a long time," keeping a view in place that the Bank of Japan will keep interest rates low, he said.
June 10-year JGB futures rose as high as 141.17, up 0.67 point on the day, and ended the morning up 0.53 point at 141.03 2JGBv1, moving towards a five-year peak of 142.00 hit in night-session trading last week.
The benchmark 10-year JGB yield fell to a fresh three-year low of 1.215 percent JP10YTN=JBTC before rising to 1.235 percent, down 1.5 basis points on the day.
In a sign of some irregularities being amended, the 20-year yen swap spread JPYSB6L20Y=TKFX stood at 1.5 basis points, after collapsing to around minus 20 basis points at one time last week, as hedge funds unwound so-called box trades.
Normally, swap rates are higher than government bond yields because of the counterparty risk involved in derivative contracts, especially in the current shaky environment when investors fret about the credit risk of financial firms.
The JGB market also drew support from a 0.88 percent drop in the Nikkei share average .N225 by midday.
U.S. Treasuries climbed on Tuesday as data showing another steep slide in home prices and plunging consumer confidence renewed the flight-to-safety bid for government debt.
The Conference Board said on Tuesday its index of U.S. consumer confidence fell to a five-year low in March, while consumers' expectations for the future tumbled to their lowest level in 34 years.
Separately, Standard & Poor's said its S&P/Case-Shiller home price index fell sharply in January, with most regions in the country suffering record price declines. For details see [ID:nN25377096].
Wednesday marked the last day for delivery for the business year ending on March 31, possibly encouraging some buying, traders said.
The five-year yield JP5YTN=JBTC fell 5 basis points to 0.705 percent and the two-year yield fell 2.5 basis points to 0.545 percent. (Editing by Michael Watson)