JGBs fall, but expectations of BOJ easing offer support

Tue Oct 23, 2012 2:41am EDT

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By Dominic Lau and Lisa Twaronite

TOKYO, Oct 23 (Reuters) - Japanese government bonds slipped on Tuesday after two sessions of gains, tracking an overnight fall in U.S. Treasuries, but they were supported by growing expectations of new easing steps by the Bank of Japan.

U.S. Treasury prices slipped on Monday, ahead of the sale of $99 billion of U.S. government debt this week.

The benchmark 10-year JGB yield added 0.5 basis point to 0.780 percent after rising as high as 0.790 percent, approaching last week's peak of 0.795 percent, its highest since late September.

The 10-year JGB futures contract eased 4 ticks to 143.98 after hitting a session low of 143.80. Support was seen at last week's low of 143.79, which was its lowest since Sept. 21.

"JGBs still haven't broken out of their recent ranges despite the yield on benchmark U.S. Treasuries rising above 1.8 percent and the dollar/yen rising above 80, so it is hard to predict JGB yields moving much," said Credit Suisse strategist Shinji Ebihara in Tokyo.

"You can't really call this a risk-off market," he added.

The yen skidded to a three-month low of 80.02 yen against the dollar and a five-month low against the euro on the heightened expectations Japan will ease policy.

The BOJ is leaning toward easing monetary policy again at its Oct. 30 meeting, according to sources familiar with its thinking, with policymakers discussing additional steps that could be taken together with a further increase in its asset-buying programme.

The most likely option is a further 10 trillion yen ($126 billion) increase, mostly in the form of government bond buying. But it might also include a small increase in purchases of exchange-traded funds (ETF) and real estate investment trusts (REIT), the sources said.

Sources have also said the central bank will likely cut its long-term economic and price forecasts at next week's meeting.

"Even if other assets make big moves, we don't expect JGB yields to move much as investors await next week's BOJ meeting," said a fixed-income fund manager at a Japanese asset management firm.

Yields on the 20-year yield added 2 basis points to 1.695 percent, while those on the 30-year debt rose 2.5 basis points to 1.950 percent.

The spread between the 10- and 20-year bonds widened to 91.5 basis points, its highest level in 11 months.

But Yuya Yamashita, rates strategist at J.P. Morgan, said it was partly skewed by demand from domestic banks in the 10-year sectors or below. Their purchases fluctuated greatly from one month to the next, as it was difficult to time when to bet on the spread to tighten in a flattening trade, he said.

"City banks' buying tends to be volatile, fluctuating from positive to negative," Yamashita said.

"It really depends on city banks' activity," he added.

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