April 20, 2018 / 6:30 AM / 3 months ago

JGB futures hit 9-week low on tepid auction response, weak U.S. bonds

TOKYO, April 20 (Reuters) - Japanese government bonds dropped on Friday with the benchmark futures hitting nine-week lows after U.S. bonds fell on worries about inflation and more bond supplies, hurting sentiment further after a weak 20-year JGB auction the previous day.

The June JGB futures fell 0.27 point, the biggest daily fall as benchmark contract since Jan. 10, to 150.58, the lowest close since Feb. 13.

U.S. and European bond prices tumbled on Thursday as higher oil prices fanned inflation expectations while the spectre of a large supply of U.S. Treasuries next week also added to the woes.

The 10-year cash JGB yield rose 2.0 basis points to 0.055 percent, the highest level since March 9.

The 20-year yield jumped 2.5 basis points to a three-week high of 0.530 percent, off 16-month low of 0.495 percent hit earlier in the week.

Thursday’s auction of 1.0 trillion yen ($9.29 billion) 20-year JGBs drew weak bids, pouring cold water on bullish sentiment in recent months that domestic investors may come back to JGBs as foreign bonds look less attractive.

“Until yesterday’s 20-year JGB auction, investors were happily buying. But after the auction, buyers have all disappeared,” said a trader at a Japanese brokerage.

“To attract buyers, their yield will have to rise to levels we have not seen in the new financial year (that started on Apr. 1,)” he said.

The 30-year yield rose 1.5 basis points to 0.715 percent.

At the shorter end, the five-year yield rose 1.5 basis point to minus 0.095 percent, a high last seen in early March.

Still JGB options were pricing in limited price moves ahead.

Traders say JGB futures options are traded at implied volatility of about 0.9 percent.

S&P-JPX JGB volatility index hit a record low of 1.25 on Wednesday. ($1 = 107.63 yen) (Reporting by Hideyuki Sano; Editing by Vyas Mohan)

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