JGBs gain on solid auction, 10-yr yield may test 1-yr low

Thu Jan 12, 2012 2:37am EST

Related Topics

* Year's first auction draws strong demand

* 10-year yield seen testing last year's low of 0.940 pct

* Thursday sees launches of big samurai and uridashi issues

* 30-year yield rises ahead of auction next week

By Hideyuki Sano

TOKYO, Jan 12 (Reuters) - Japanese government bond prices firmed on Thursday after this year's first debt auction drew solid demand from Japanese investors led by banks, as they stick to a pessimistic view on the world economy.

The strong auction result is boosting views that the 10-year yield could soon drop below last year's low of 0.940 percent, even in the face of concerns about whether Prime Minister Yoshihiko Noda can to achieve his fiscal reform agenda and bring down public debt that is now double the size of the $5 trillion economy.

The Finance Ministry's sale of 2.2 trillion yen ($28.60 billion) in 10-year JGBs, the first bond auction this year, drew solid demand, clinching a lowest price above market expectations and triggering short-covering in futures.

Ten-year JGB futures ticked up 0.13 point to 142.61 while the cash 10-year bond yield fell 1.0 basis point to 0.955 percent.

The five-year bond yield also slipped 0.5 basis point to 0.330 percent, a seven-week low.

Buying came from investors who were holding cash at the start of the year hoping solid U.S. payroll data would give better entry levels such hopes as a solid reading in Friday's U.S. job data failed to lift bond yields of major countries.

"I think it was a shock to many investors that U.S. yields didn't jump after the strong payroll data last week. Sentiment has not improved enough to prompt shift from bonds to equities," said a trader at a Japanese bank.

Market players think Japanese investors, who collectively gobble up more than 90 percent of JGBs, have little alternative but to buy yen bonds as they shun risk assets and euro zone bonds on worries about the European debt crisis.

In a sign of the strong appetite for yen bonds, two Australian banks -- National Australia Bank and Australia and New Zealand Banking -- launched a combined 168.5 billion yen of samurai bonds on Thursday, much more than expectations of about 140 billion yen.

In addition to Australian banks, which are deemed safer than their peers in the U.S. and Europe because of their limited exposure to Europe, British bank Barclays also launched 125 billion yen in uridashi bonds, or retail-targeted euroyen bonds, one of the largest uridashi issues ever.

Bucking the overall trend was the longest end of the yield curve, with the 30-year government bond yield rising 1.0 basis point to 1.920 percent.

The 10- and 30-year yield spread widened to 96 basis points, the biggest in seven weeks, though many market players said that reflected positioning ahead of a 30-year bond auction on Tuesday and they do not expect a steepening in the curve.

In contrast to firmness in JGBs, which have been supported by expectations of buying by Japanese investors, the cost of insuring against a Japanese credit default stood near a record high, even as spreads for most European countries have dipped in the past few days.

Concerns that Prime Minister Yoshihiko Noda could struggle to push his plan to raise the sales tax through parliament, expected to be convened later this month, are driving CDS spreads higher.

But some market players think worries about Japan's lack of a plan to recover its fiscal health could put a damper on cash JGBs in the future if Noda's effort to eventually double the sales tax from its current 5 percent is seen to be falling apart.

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