Japanese bonds tumble as stocks hits 6-weeks high on rallying oil prices

The Japanese government debt instrument traded weak on Wednesday amid tracking strong cues emerging from equities and crude oil prices. Japanese shares rose for 2nd straight day, with the Topix index heading for its biggest gain in 6-weeks, as a weaker yen boosted exporters and higher oil prices drove gains among commodity producers. The benchmark 10-year bonds yield, which is inversely proportional to bond price rose 15.38 pct to -0.077 pct and 3-year bonds yield jumped 4.12 pct to -0.233 pct 7:15 GMT.

Also, the Japanese bonds have been closely following developments in oil markets because of their impact on inflation expectations. The Brent crude oil, a global benchmark, was lifted on hopes that key oil producers could agree on a production freeze this Sunday. The International Brent futures rose 0.34 pct at $ 44.39 and West Texas Intermediate (WTI) jumped to $ 41.78, from yesterday’s prices of $40.62.

The Topix added 2.5 pct to 1,332.44 at the trading break in Tokyo, with 11 shares rising for each that fell. All 33 industry groups on the index climbed. The Nikkei 225 Stock Average gained 2.8 pct to 16,381.22.

Meanwhile, both investors and dealers are seen unwilling to chase higher prices in the JGB market today, though the BoJ bought JPY350bn of JGBs in the 1-year to 3-year zone, JPY440bn of JGBs in the 3-year to 5-year zone, and JPY450bn of JGBs in the 5-year to 10-year zone today under its massive JGB purchase program ahead of tomorrow's monthly JPY800bn 30-year JGB auction to re-open the current issue. The results of today's JGB buying operations, which the BoJ published around noon, were mixed in the 5-year to 10-year zone.

Today, BoJ policy board member Harada spoke to local business leaders in Yamaguchi Prefecture. His remarks had limited immediate impact on JGBs.

The Bank of Japan board member Yutaka Harada said that unable to express that whether it is impossible to lower rates further into negative territory in April and the BOJ will fully debate on additional easing steps if needed to respond to economic risks. Said if the BOJ eases policy immediately, it does not violate pledge to avoid incremental steps and strong yen does weaken upward pressure on prices. The inflation expectations will improve once oil price declines fades away and it is completely possible to meet price target but timing will be delayed, he further added.

Moreover, 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.