JGBs slip as investors take cue from strong stocks

Wed Oct 17, 2012 2:25am EDT

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* Yield curve steepens; superlongs underperform before 20-yr sale

* 10-yr, 20-yr yield spread at widest since Nov 2010

By Lisa Twaronite

TOKYO, Oct 17 (Reuters) - Japanese government bonds fell for a second day on Wednesday, pushing benchmark yields to a one-week high, as rallying equities took away some of the appeal of fixed-income assets.

The Nikkei share average rose 1.2 percent to its highest close since Oct. 5 as the yen fell to a one-month low against its major counterparts.

"There's a 20-year auction tomorrow, so domestic supply will be in focus again, but for now, the JGB market is paying attention to external factors again, and tracking the overnight fall in U.S. Treasuries," said a fixed-income fund manager at a Japanese asset management firm.

Treasuries dipped in U.S. trade on Tuesday on persistent talk that Spain may soon ask for a bailout and a German ZEW survey that suggested improving confidence. News that Goldman Sachs reversed a year-earlier loss in the third quarter also lifted risk sentiment.

"Europe's situation appears to be more stable than it was before, but a lot is still unclear, as is the outlook for the U.S. economy," the fund manager added.

The benchmark 10-year JGB yield added 1 basis point to 0.765 percent after rising as high as 0.770 percent, its highest since Oct. 10.

The 10-year JGB futures contract ended down 0.09 at 144.19, below its 14-day moving average, now at 144.22. Support was said to lie at its 20-day moving average at 144.11.

"The current environment lacks dynamic transactions capable of moving the market," said strategists at RBS Securities in Japan, who noted that cases in which bond futures did not move by 0.01 during a minute have been more frequent than cases in which they moved by 0.01 or more.

In such market conditions, "the key point, though simple, is focusing on carry and rolldown return," they said in a note to clients on Wednesday.

The 5-year JGB fared better than longer maturities after an auction of that tenor on Tuesday met with record-high demand. The yield on the 5-year note gained half a basis point to 0.195 percent.

On Thursday, the Ministry of Finance will offer 1.2 trillion yen of 20-year JGBs, which was expected to keep selling pressure on superlong maturities.

"Relative to the 10-year sector, the 20-year is cheap, so we are expecting a smooth auction," said Credit Suisse strategist Shinji Ebihara in Tokyo.

The spread between the 10-year and 20-year yields rose to 0.910 on Wednesday, its widest since November 2010.

The 20-year yield and the 30-year yield both added 1.5 basis points to 1.675 percent and 1.930 percent, respectively.

The market had a muted reaction to Japanese media reports that Prime Minister Yoshihiko Noda plans a new round of economic stimulus by the end of next month to jump-start the sluggish economy.

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