JGBs edge up on BOJ easing expectations, Spain woes

Mon Apr 16, 2012 2:50am EDT

Related Topics

* 10-yr yield slips to lowest level since November 2010

* 30-yr yield touches 8-week low before rebounding

* Investors expect 10-yr yield in range this week-survey

* Decent demand expected at Tuesday's 5-yr auction

By Lisa Twaronite

TOKYO, April 16 (Reuters) - Japanese government bond prices edged up on Monday, with the 10-year yield falling to a 17-month low, as renewed fears about the European debt crisis and expectations of future Bank of Japan easing steps added to the appeal of fixed-income assets.

"The global risk-off tone is pressuring yields," said Credit Suisse strategist Shinji Ebihara. "But it is difficult to expect JGBs to move out of their current ranges in the short-term."

Reuters' weekly JGB market survey showed that JGB market participants expect long-term yields to tread water in a narrow range this week.

The yield on the latest 10-year notes edged down 1 basis point to 0.930 percent, a level not seen since November 2010.

Expectations of more easing steps from the Bank of Japan continued to underpin JGBs. The BOJ held policy steady as expected last week, and sources said the central bank could ease by increasing government bond purchases under its 65 trillion yen asset-buying and loan programme at its next meeting on April 27.

"We are not going to see much movement ahead of the BOJ meeting and with easing expected, no one is selling bonds. Worries about Spain's debt situation are also keeping demand firm," said a fixed income fund manager at a Japanese trust bank.

The Spanish benchmark government bond yield soared on Friday after data showed Spanish banks borrowed heavily from the European Central Bank in March, reviving concerns over struggling euro zone countries' ability to finance their debt.

The June 10-year JGB futures contract closed up 0.10 point at 142.69.

DECENT DEMAND EXPECTED AT 5-YEAR AUCTION

Investors looked ahead to Tuesday's auction of 2.5 trillion yen of five-year JGBs by the finance ministry. The yield on the 5-year cash bond was down half a basis point to 0.285 percent, below the expected 0.3 percent coupon rate of the reopened issue.

"While the yield lacks catalysts for a reversal upswing for the time being, we advise a buy-on-dips stance because an auction conducted below 0.3 percent is not attractive," said RBS strategists in a note to clients on Monday.

Nonetheless, some market participants expect decent demand even at the current strong levels, from banks as well as brokers covering their short positions.

The five-year tenor has outperformed since the BOJ's last move to ease policy on Feb 14. The central bank purchases bonds with up to two years left to maturity in its asset buying programme, and many market participants expect that to be eventually extended to five years.

The yield on 20-year JGBs was flat at 1.720 percent, after earlier retracing Friday's low of 1.705 percent, which was its lowest level since Feb. 3.

The yield curve steepened on Monday as the 30-year JGB yield added half a basis point to 1.900 percent, as some investors took profits after it earlier fell as low as 1.890 percent, its lowest level since Feb. 20.

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