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JGBs push higher on post-ECB relief, smooth auction

Reuters - Friday, July 4

* JGBs climb, ECB cools expectations of further rate hikes

* Bond dealers relieved after smooth 10-year auction

* Benchmark yields up on the week after hitting 7-wk low

By Eric Burroughs

TOKYO, July 4 - Japanese government bonds pushed higher on Friday, with investors relieved after the European Central Bank failed to signal any further tightening of monetary policy and a 10-year bond auction the previous day went better than expected.

The ECB lifted rates to 4.25 percent as widely expected, but comments from ECB President Jean-Claude Trichet that the central bank did not have a policy bias helped cool expectations for more such hikes later this year. [ID:nL0323441]

The ECB's move to tighten rates to contain inflation, even as euro zone growth shows signs of faltering, was seen as a factor that could open the door for the Bank of Japan to also tighten monetary policy in the months ahead.

At the same time, the U.S. payrolls data on Thursday showed companies cutting 62,000 jobs in June, close to expectations and suggesting the economy is still suffering from the housing market slide and credit crunch.

The figures helped to cool speculation about how quickly the Federal Reserve could also consider lifting rates after its aggressive cuts to 2 percent.

A decent auction of 10-year paper the previous day also gave some relief to the market, which had suffered through a string of poor offerings during a three-month sell-off that petered out in mid-June.

"The ECB didn't sound as hawkish as feared, and the U.S. jobs report confirmed that the U.S. economy keeps deteriorating," said Naomi Hasegawa, senior interest-rate strategist at Mitsubishi UFJ Securities.

But Hasegawa said bond yields are prone to swinging in both directions as investors grapple with the potential inflationary impact of record high oil prices, just as the Japanese and global economies show more signs of losing steam.

"It could do in either direction. It depends on oil prices, global growth and how central banks will react," she said.

September 10-year futures <2JGBv1> climbed 0.37 point to 135.23.

Trading activity was subdued, with U.S. financial markets set to be closed later in the day for the Independence Day holiday.

The benchmark 10-year yield <JP10YTN=JBTC> fell 4.5 basis points to 1.625 percent, back near a seven-week low of 1.585 percent hit on Monday. But for the week, the 10-year yield is up 1.5 basis points.

Atsushi Ito, a fixed-income strategist at Morgan Stanley, also said that it will be harder for JGB yields to fall further.

"Yields are not in position for a one-way decline although economic growth prospects are clearly less favourable. A single rate hike by the ECB will not be enough to quell inflation, and this will remain a buoyant factor for yields," Ito said.

The five-year yield <JP5YTN=JBTC> dropped 2.5 basis points to 1.225 percent, while the two-year yield was down <JP2YTN=JBTC> 2 basis points at 0.820 percent.

Earlier this week, the BOJ's quarterly tankan report showed sentiment at big Japanese manufacturers hitting a five-year low but not dropping as sharply as economists had expected.

The tankan helped keep intact expectations that the BOJ will next move to raise rates from the current 0.5 percent sometime in the next year, even as investors see much less risk of a move than previously.

Swap contracts on the overnight call rate <JPONIBOJ=TRDT> are showing a roughly 30 percent of a BOJ rate hike at the end of the year, up from near 25 percent a week ago. (Additional reporting by Shiho Tanaka; editing by Sophie Hardach)

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