JGB yields fall, Tuesday's 10-year auction eyed

Mon Jul 2, 2012 2:28am EDT

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By Dominic Lau

TOKYO, July 2 (Reuters) - Japan's government bond prices rose on Monday, with superlongs outperforming, driven by demand at the start of the quarter, while the response for Tuesday's auction of 10-year debt was likely to be fair despite an expected low coupon rate.

The yield on both the 20- and 30-year JGBs dipped 1.5 basis points, to 1.645 and 1.865 percent respectively.

The 10-year yield ticked down 1 basis point to 0.825 percent, reversing a rise on the back of Friday's agreement by European leaders to bring down the borrowing costs of Spain and Italy, and ahead of Tuesday's auction of 2.3 trillion yen ($28.83 billion) worth of 10-year debt.

"We cannot expect the demand to be extremely good but we don't think the demand will be poor," said Naomi Muguruma, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities.

The new offer is expected to carry the lowest coupon in nine years, of 0.8 percent, 10 basis points below the last two auctions of similar maturity.

"The JGB market seems to be well supported. I think investors are deep buyers, given that the 10-year JGB yield declined faster than had expected in previous quarter," Muguruma said.

"It seems domestic investors are still behind in their JGB investment plan, so if there is any dip in tomorrow's auction. There should be good buy-on-dip demand."

The benchmark 10-year yield had fallen 15.5 basis points in April-June to log its biggest fall since July-September 2010.

LITTLE TANKAN IMPACT

Monday's fall in JGB yields came despite the Bank of Japan's tankan survey showing that Japanese manufacturers were less pessimistic about business conditions in the three months to June, a sign that the economy was on track for a moderate recovery amid the pain from Europe's debt crisis and slowing overseas growth.

But Shogo Fujita, chief Japan bond strategist at Bank of America Merrill Lynch, said the 10-year yield could be ripe for a correction and may test the 0.9 percent level in the next 10 days, partly as the pressure on the BOJ to ease in next week's meeting has faded slightly.

"Given the move by the euro zone leaders, it gives some room for the BOJ to breathe. Had they had not done anything and, say, the ECB does nothing this week, I am sure the BOJ will be pushed verbally to keep up its quantitative easing stance or maybe do something as well," Fujita said.

"We will be pricing out a little bit of aggressive BOJ which is already priced in in 10-year bonds."

Apart from debating whether the economy needs further monetary stimulus, BOJ policymakers will issue revised quarterly growth forecasts after their two-day meeting starting on July 11.

The 10-year JGB futures were up 0.08 point at 143.77, holding above their 20-day moving average. About 30,353 contracts changed hands, up from last Friday's 24,279 and last two weeks' average of 21,189.

A Thomson Reuters weekly survey showed sentiment towards Japanese government bonds deteriorated for a third straight week, with the poll's sentiment index skidding to its lowest level since it began in June 2011.

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