Short-dated Japanese bonds rally after economic growth data disappoints

By Rocky Swift

TOKYO, Feb 16 (Reuters) - Short-term Japanese government bonds (JGBs) rose on Monday following data that showed the economy grew far slower than expected last quarter.

The two-year JGB yield JP2YTN=JBTC, the one most sensitive to Bank of Japan policy rates, decreased 1.5 basis points (bps) to 1.265%. The five-year yield JP5YTN=JBTC fell 1 bp to 1.670%. Yields move inversely to bond prices.

Japan's gross domestic product edged up 0.2% in the October-to-December quarter, official figures showed on Monday, short of the median estimate for a 1.6% gain in a Reuters poll of economists. That followed a speech on Friday by BOJ board member Naoki Tamura, who said Japan is "very close" to achieving the central bank's 2% inflation target, signaling the chance of a rate increase in coming months.

"Board member Tamura may have deliberately used the vague phrasing 'as the weather warms up' to leave room for a rate hike at the March meeting," Ataru Okumura, a senior rates strategist at SMBC Nikko Securities, said in a client note.

The benchmark 10-year yield JP10YTN=JBTC was flat at 2.210% after a three-day drop. The 20-year JGB yield JP20YTN=JBTC climbed 1.5 bps to 3.060%.

Long-term JGB yields surged to record highs last month on concerns about the potential scale of stimulus from Prime Minister Sanae Takaichi, a fiscal dove.

But a measure of calm has returned to the JGB market following a sweeping election victory for Takaichi's party on February 8 on expectations the mandate will give her the leeway to keep to her pledge of "responsible" stimulus.

"It seems like the government of Japan is least cognizant of markets and what their impact might be," said Tom Garretson, senior portfolio strategist at RBC Wealth Management.

"If they don't push too far on fiscal measures and eroding the balance sheet further, it looks like there's at least a balance between what the markets are willing to tolerate and the goals of the administration," he added.