JGB prices mostly erase losses; superlongs underperform
* BOJ meeting outcome awaited, with failed operations in focus
* 10-yr yield steady after last week's drop to nearly 9-year low
* Curve steepens slightly as long end falls ahead of 20-year sale
By Lisa Twaronite
TOKYO, May 22 (Reuters) - Most Japanese government bonds erased early losses on Tuesday on bargain-hunting, with only longer tenors underperforming ahead of the sale of a 20-year security later in the week.
Investors also awaited the outcome of the Bank of Japan's two-day meeting which began on Tuesday, for any clues about whether the BOJ intends to tweak its operations after it missed its target for buying government bonds twice last week. The BOJ is widely expected to refrain from policy changes.
"How the BOJ deals with their failed operations will have a big influence on the yield curve. If they continue on their current course, they will almost certainly have to extend up the curve, which is very bullish for the bond market," said Neale Vincent, a strategist at Nomura Securities in Tokyo.
The central bank now buys bonds with up to three years left to maturity, after extending that limit from two years at its last meeting in April.
"What I would think is more sensible is if they diversify their operations - buying more Nikkei ETFs etc - something that doesn't involve buying bonds," Vincent said.
Last week, the BOJ fell short of its government bond-buying target under its asset-buying programme. It also missed its target for buying government bonds under its market operations on Friday for the first time in more than six years, as banks preferred to hold onto their JGBs rather than sell them to the central bank.
HOPES FOR EU PROGRESS ON DEBT
The front-month 10-year JGB futures contract ended up 0.05 point at 143.25.
The 10-year bond yield was flat at 0.855 percent after its earlier rise to 0.865 percent. Friday's low of 0.815 percent was its lowest level since July 2003.
"Ahead of Greece's election next month, we might not see a 0.9 percent yield on the 10-year bond," said a fixed-income fund manager at a Japanese asset management firm in Tokyo.
Greece will hold a vote on June 17, with the country's possible exit from the euro at issue after an election this month led to a political impasse over austerity steps.
Investors hope an informal European summit on Wednesday results in progress toward resolving the region's debt crisis. France's new president Francois Hollande is likely to propose mutualising European debt, to fend off contagion of funding difficulties from troubled euro zone economies.
The yield curve steepened as longer tenors slightly underperformed ahead of a 20-year auction on Thursday.
The 20-year yield gained 1.5 basis points to 1.640 percent. On Friday it fell as low as 1.570 percent, its lowest level since August 2010.
The 30-year bond yield added 1.5 basis points to 1.795 percent after touching 1.730 percent on Friday, its lowest since September 2010.
Japanese banks logged a record net sale of 5.02 trillion in JGBs in April, according to data from the Japan Securities Dealers' Association released on Monday.
But trading volume was also at a record high, "suggesting brisk sales and switching activity to take profits," said JGB strategists at Barclays in Tokyo.
Life insurers bought a net 624 billion yen worth of superlong bonds, down from the previous month but in line with their average purchases.
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