JGBs rise as stocks give back gains after election

Japanese government bonds inched up on Monday with investors shifting their money back to safe-haven government debt as shares quickly erased gains made after a historic victory by the opposition in a national election.

September JGB futures slipped in early trade as Tokyo's Nikkei share average hit its highest in 11 months amid a celebratory mood as the opposition Democratic Party victory will break deadlock in parliament, and on better-than expected output data.

But the lead futures contract soon reversed its course, crawling towards a five-month peak hit earlier this month, as shares lost steam.

The JGB market was also supported by month-end demand from investors keen to extend durations in their bond portfolios. Investors often buy bonds with long maturities around the end of the month to try to match their holdings to benchmark indexes.

Such demand helped push down longer-dated bonds a little, leading the yield curve to flatten.

"The firm tone in the JGB market is intact as investors believe it will take some time before the economic recovery becomes solid enough to prompt the Bank of Japan to raise interest rates," said Makoto Yamashita, chief Japan interest rate strategist at Deutsche Securities.

Investors have little choice but to shift their money to government bonds as they are still hesitant to aggressively buy riskier assets such as stocks, Yamashita said.

September 10-year JGB futures climbed 0.17 point to 139.20 after falling as low as 138.91 in early trade. The lead contract reached a five-month high of 139.36 earlier this month. The benchmark 10-year yield edged down 1 basis point to 1.295 per cent, matching a six-week low first struck last week.

Sunday's huge win by the Democratic Party of Japan (DPJ) ends a half-century of almost unbroken rule by the Liberal Democratic Party (LDP) and raises the prospect of a shift in government policies.

"The bond market is showing little reaction to Sunday's election as the result was widely expected," said Hidenori Suezawa, chief fixed-income strategist at Daiwa Securities SMBC.

Bond investor focus is now shifting to the line-up for the new cabinet and how the incoming government will finance its campaign promises.

Analysts say the decade-old Democratic Party's spending plans could give a short-term lift to the economy, just emerging from recession, but worry that its programmes will boost public debt, already equal to about 170 per cent of GDP.

The Nikkei share average was down 0.4 per cent by midday after touching an 11-month high.

Government data on Monday showed factory output rose 1.9 per cent in July, beating the median forecast in a Reuters poll of 1.4 per cent, but slowing from a 2.3 per cent gain in June.

The data also showed manufacturers expected output to rise 2.4 per cent in August and 3.2 per cent in September.

The two-year yield rose 0.5 basis point to 0.250 per cent after the data.

But the 30-year yield fell 1 basis point to 2.210 per cent. The yield curve flattened slightly as a result.