JGBs strong on weak Tokyo stocks, overnight falls in U.S. shares, strength in Treasurys; lead September futures +0.50 at 135.03, 5- and 10-year yields down 3.5 bps each at 1.25% and 1.66%, respectively. "There was tons of bad news in the U.S. yesterday - still in a bear market, the stock drop - so it's natural to see a rally in bonds today," says RBS strategist Nhan Ngoc Le. Key event will be auction of Y1.9 trillion in 5-year JGBs; Nhan predicts traders will sell 5-years ahead of auction to push up coupon, induce MOF to offer 1.3% coupon at tender. Today's auction "is a very important test of the market," to see whether market more concerned about slowing growth - something that's likely to spur demand for bonds - or inflation, which would hurt bond demand. "If you see strong demand, the market will rally further - probably we can see another 10-20 bps drop in yields. But if it's weak then we might expect the market to stay rangebound for a while at its current level."
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