JGBs drop on ECB bond-buying plan; U.S. jobs report awaited

Fri Sep 7, 2012 4:01am EDT

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* Yields rise for second day but recent ranges intact

* 30-yr yield hits more than 4-month high

By Lisa Twaronite

TOKYO, Sept 7 (Reuters) - Japanese government bond prices fell for a second day on Friday after the European Central Bank unveiled a bond-purchase scheme to help rein in soaring yields in some southern euro zone countries, sparking rallies in equities and other risk assets.

Investors are now focusing on the U.S. nonfarm payroll report due out later on Friday -- expected to be a key determinant in whether the Federal Reserve embarks on further stimulus steps, including a possible a third round of quantitative easing, or QE3.

Strategists said yields in all major bond markets could face upward pressure if the report surprises on the upside -- the chances of which seem to have risen after data showed U.S. companies added staff in August at the fastest clip in five months.

A gauge of employment in the service sector also improved and another report showed new claims for jobless benefits fell last week to the lowest level in a month.

"Together, these data points suggest the U.S. labor market turnaround seen in July was sustained into August. If these conditions are reflected in tonight's employment report, market expectations for QE3 could see a pullback," wrote strategists at Credit Suisse in a report on Friday.

The Fed next meets Sept. 12-13.

For Friday's nonfarm payrolls report, economists expect modest hiring of 125,000 new jobs. The unemployment rate is seen holding steady at 8.3 percent.

The 10-year JGB futures contract for September ended down 0.16 point at 143.93 after falling as low as 143.85. The contract's last trading day is Sept. 12.

In the cash bond market, the 10-year bond yield rose 1.5 basis point to 0.815 percent, after rising as high as 0.820 percent.

The yield has fallen since hitting a two-month high of 0.860 percent in mid-August but remains well off a nine-year low of 0.720 percent marked several times in late July.

The spread between the 10-year and 30-year yields stood at 1.090, matching levels hit in late August which were its widest since October 2010, and up sharply from 0.980 as recently as mid-July.

"Last year, I was recommending overweighting the long end, but now I'm not. It is cheap, but in order to realize that cheapness, you've got to have flattening," said Neale Vincent, strategist at Nomura Securities.

The 10-year sector, which has become expensive, has roll-and carry -- the capital and carry gains made over time if the yield curve maintains its current shape -- of around 10 basis points over six months.

"The 30-year sector has roll-and carry of 5 basis points, so in order for it to be worthwhile to hold the 30s, you've got to expect 5 basis points of flattening to make up for the lack of roll-and-carry. That's why people have been diving into the 8- to 10-year sector," he said.

"A lot of investors think that nothing is going to happen, which is why they view the middle of the curve as attractive."

The 30-year bond yield rose half a point to 1.905 percent, its highest level since April 24. The 20-year bond yield added 1 basis point to 1.660 percent.

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