JGBs flat ahead of Q1 GDP figure, likely to slump on firm crude

The Japanese government bonds traded nearly flat on Tuesday as investors await the first quarter Gross Domestic Product (GDP) data, which will provide cues on the possibility of further monetary easing by the Bank of Japan. Moreover, bond prices are likely to be ruled by the movements in the crude oil market. The yield on the benchmark 10-year bonds, which moves inversely to its price stood unchanged at -0.108 pct, yield on 30-years bonds fell 1bp to 0.358 pct, yield on 40-year bonds remained steady at 0.380 pct and the yield on 2-year bonds hovered at -0.246 pct by 0635 GMT.

The Japanese bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Bank of Japan's target. Today, the crude oil prices jumped more than 3 pct after long-time bear Goldman Sachs said the market had ended almost 2-years of oversupply following global oil disruptions and flipped to a deficit. Reuters in its recent report said that supply disruptions from Nigeria, Venezuela, the United States and China triggered a U-turn in the oil outlook of Goldman Sachs, which long warned of overflowing storage and another looming crash in prices. Venezuela's oil production has already fallen by at least 188,000 barrel per day (bpd) since the start of the year as PDVSA struggles to make the investment needed to keep output steady. In the United States, crude production has fallen to 8.8 million bpd, 8.4 pct below 2015 peaks as the sector suffers a wave of bankruptcies. And in China, output fell 5.6 pct to 4.04 million bpd in April, compared with the same time last year. Meanwhile, the International benchmark Brent futures rose 0.51 pct to $49.22 and West Texas Intermediate (WTI) jumped 0.98 pct to $48.19 by 0530 GMT.

“Oil prices continued to gain overnight, driven by firming demand and disruption in Canada, Venezuela and Nigeria,” the ANZ economists said in a note.

The Japan March industrial production increased 3.8 pct m/m, from 3.6 pct in February. On annual basis, it rose 0.2 pct y/y, as compared to prior 0.1 pct and capacity utilization jumped 3.2 pct, from down -5.4 pct in February.

The investors will pay close attention to the Q1 GDP figure. The Cabinet Office will announce Q1 GDP data on Wednesday, 18th May (2350 GMT). The Japanese 2016 Q1 GDP is expected to increase 0.2 pct annualized, from down 1.1 pct in the previous quarter of 2015. Individually, Q1 private consumption, which accounts nearly 60 pct of the GDP is anticipated to increase 0.2 pct, after 0.9 pct decline in the last quarter. On the other hand, capital spending is likely to decline 0.8 pct, after rising 1.5 pct in Q4 of 2015 and external demand is expected to remain unchanged at 0.1 pct.

The BoJ's adoption of negative rates in January has driven JGB yields below zero, while also increasing its market volatility. Further, we expect an expansion of stimulus, and if the market happens to rule out any additional boost in stimulus, that would create an opportunity to go long and we also foresee that the 10-year note will yield about -0.15 pct at year-end. Meanwhile, Japan’s Nikkei share average rose with a strong performance on Wall Street, higher oil prices and a weaker yen boosting investor sentiment. The benchmark Nikkei 225 index closed up 1.13 pct at 16,652.80, the broader Topix index closed high 1.07 pct to 1,335.85 points.