JGBs gain, pushing 10-yr yield to 7-month low; 40-year sale eyed

TOKYO Wed Nov 7, 2012 10:21pm EST

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TOKYO Nov 8 (Reuters) - Japanese government bonds rallied across the curve on Thursday, sending benchmark yields to touch a 7-month low, as investors sought safe havens on fears about the looming U.S. fiscal crisis.

* President Obama is facing a political showdown over the so-called "fiscal cliff" of about $600 billion in expiring tax cuts and spending reductions due to take effect in January. Some analysts warn the drop could hit the U.S. economy harder than expected.

* The 10-year yield slipped half a basis point to 0.755 percent after falling as low as 0.750 percent, its lowest since April 7.

* "The mood has turned to risk-off as investors ponder the fiscal cliff. Even though the 10-year sector is expensive, it's the most liquid and there are still buyers," said a fixed-income fund manager at an asset management firm in Tokyo.

"Should we buy, too? We are balking, but what else can we do?" he added.

* Ten-year JGB futures ended morning trade up 0.09 point at 144.42, moving back toward a three-month high of 144.47 touched last week. They hit an intraday high of 144.45.

* The superlong sector reversed the previous session's losses, with yields on 30-year bonds losing 1.5 basis points to 1.935 percent, while yields on 20-year debt also fell 1.5 basis points to 1.675 percent.

* The market mood is expected to support demand at Thursday's quarterly sale of 40-year bonds.

The Ministry of Finance offered 400 billion yen worth of 40-year debt with a coupon of 2.0 percent, reopening the number 5 issue.

"The investor class interested in 40-year JGBs is limited and the issuance amount is small, so auction results at this maturity can swing widely between good and bad," said strategists at Bank of America Merrill Lynch in a note to clients.

"Although 40-year JGBs are not particularly cheap within their sector, they should attract a certain amount of demand, allowing the auction to pass without incident," they said.

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