Tokyo, July 7: Cash and futures Japanese government bonds (JGBs) edged lower on corrective selling to their recent gains, traders said. The 4.6 per cent 177th JGB, the cheapest deliverable cash issue for the nearby December, was purchased by a few traders. The December contract is due to expire on December 15.

"The 177th JGB may have been bought in a bid to squeeze short position holders in the December," said a European bank trader. In September last year, a severe short-squeezing took place by a major US brokerage firm in September JGB futures.

The short-squeeze drove up the lending rate for the cheapest cash JGBs deliverable against the September contract to a stunning 32 per cent, traders said. Traders said, however, the active purchase of the 177th issue may not result in a similar squeeze of the December, because the December's expiry is still far away and the bitter memories of short-squeezing in September are still fresh. A MoF official said that the 177th issue has total outstanding volume of one trillion yen in the market. The bond market was otherwise quiet and it failed to maintain its early gains on steep falls in Tokyo share prices.

The Nikkei 225 share index fell 262.83 points or 1.32 percent to 19,705.17. Its September futures slipped 140 to 19,770. JGBs rose early in the morning due to weakness of Tokyo share prices, a rise in the yen versus the dollar and firmness of cash bonds, traders said.

"Not only are traders now focusing on the bond market's tight supply/demand balance, but external factors such as moves in the foreign exchange rate and share prices have also been positive for JGBs," a regional bank trader said earlier.

The dollar fell by almost two yen to 112.20 yen in Tokyo due to lingering worries about Japan's expanding trade surplus, traders said. Japanese trade data for the first 20 days of June showed a surplus of 453.20 billion yen against a surplus of 197.65 billion yen in the same period a year earlier.JGBs rose briefly on the dollar's fall, but they surrendered most gains by midday on profit-taking sales.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.