Benchmark JGBs inch up but superlong underperform on fiscal fear

Wed Oct 24, 2012 3:05am EDT

Related Topics

* Superlongs underperform, with 30-yr yield up 1 bps

* Shorter-dated notes supported by BOJ easing expectations

By Dominic Lau and Lisa Twaronite

TOKYO, Oct 24 (Reuters) - Benchmark Japanese government bonds edged higher on Wednesday, as disappointing U.S. earnings sapped investors' risk appetite, and the superlong sector underperformed on worries about Japan's fiscal situation.

DuPont and United Technologies posted disappointing quarterly results on Tuesday, raising concerns about the impact of a global economic slowdown on earnings. Japan's Nikkei stock average lost 0.7 percent on Tuesday, snapping a seven-session winning streak, lending support to bonds.

"The rebound in JGB futures is because of falls in U.S. and Japanese equities, plus the BOJ monetary policy easing expectation is supportive," said Naomi Muguruma, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley.

The benchmark 10-year JGB yield slipped 0.5 basis point to 0.775 percent, while the 10-year JGB futures contract rose 10 ticks to 144.08, breaking above their 5-day moving average at 143.99.

"Trading in cash JGBs is very thin. In fact, 20-year JGBs and 30-year JGBs have not been traded this afternoon. I think investors are rating taking a wait-and-see stand, waiting for BOJ decision next week," Muguruma said.

Yields on 30-year debt added 1 basis point to 1.960 percent, their highest level since April 5. Yields on 20-year bonds put on 0.5 basis point to 1.70 percent.

Growing expectations of more monetary easing steps by the Bank of Japan (BOJ) underpinned bonds, particularly shorter maturities. The central bank is leaning towards additional easing at its Oct. 30 meeting, according to sources familiar with its thinking.

The BOJ now buys bonds with up to three years left to maturity in its asset purchase programme, and many market participants and strategists expect them to eventually extend this period. The central bank's policy has anchored short-term yields.

"The BOJ is supporting the short end, and the 10-year sector is awfully rich, but both foreigners and Japanese institutions aren't rushing in to buy on dips at the long end," said a fixed-income fund manager at a Japanese asset management firm.

Concerns that the Japanese government will face delays in the passage of a deficit-financing bond bill made some investors hesitant to buy the long end, market participants said. While recent superlong auctions have proved that healthy demand exists, many investors appear to be waiting to buy at higher yields.

"There is no rush to buy. Even though Japan's economy is not improving much, JGB yields could track those on Treasuries to some extent if the U.S. economy shows signs of improvement," a fund manager at a Japanese trust bank said.

The outlook for JGB yields depends on whether global share prices are simply in a soft patch or have entered a full-scale correction, said Chotaro Morita, chief rates strategist at Barclays Securities Japan, in a note to clients.

"In the case of a soft patch, expectations for additional BOJ easing would likely fuel yen depreciation and a correction in the undervaluation of Japanese equities, thereby leaving JGB yields with limited downside," he said.

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