JGBs steady on subdued trade, likely to slump on firm crude

The Japanese government bonds traded nearly flat on Wednesday, succumbing to thin trading activity during a relatively quiet session that saw little data of much significance. Moreover, future course in 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, remained unchanged at -0.095 percent and the yield on short-term 2-year bonds hovered at -0.230 percent by 0600 GMT.

The Bank of Japan (BoJ) Governor Kuroda retreated that they will add stimulus if needed and said Japan's economy has improved after BoJ began QQE easing. Said wage growth is necessary for better consumer spending and cost-push price rises won't bring sustainable inflation. He further mentioned that it is true that weaker yen brought cost-push effects on CPI and added Japan hasn't ended deflation completely and low bond yields reflect impact of BOJ easing. It is desirable for forex to move in stable manner, forex rates move on various factors, also desirable for forex to reflect fundamentals, he added.

In addition, 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, Crude oil tumbled more than 1 percent and pushed closer to $50 a barrel, hitting its highest in over seven months after industry data suggested a larger-than-expected drawdown in U.S. crude inventories last week. American Petroleum Institute inventory data showed crude oil dropped by 5.14 million barrels. Moreover, gasoline stocks climbed by 3.6 million barrels, while inventories of distillate fuels, including diesel and heating oil, fell by 2.9 million barrels. The International benchmark Brent futures rose 1.11 pct to $49.15 and West Texas Intermediate (WTI) jumped 1.17 pct to $49.19 by 0510 GMT.

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.

The markets will now focus on G7 meeting to be held in Japan on May 26-27, April National CPI on Thursday (2330 GMT) and BoJ’s own core CPI figure on Friday (0500 GMT). Meanwhile, the benchmark Nikkei 225 index was closed up 1.57 percent at 16,757.35, and the broader Topix index closed higher 1.23 percent to 1,342.88 points.