JGBs rise, tracking jump in Treasuries on US fiscal fears

TOKYO Thu Nov 8, 2012 10:25pm EST

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TOKYO Nov 9 (Reuters) - Japanese government bonds rose on Friday, pushing down benchmark yields to o ne basis p oint shy o f a 9-year low, after fears about a looming U.S. fiscal deadlock fueled a jump in U.S. Treasuries prices overnight.

* The U.S. economy faces the so-called "fiscal cliff" of about $600 billion in expiring tax cuts and spending reductions due to take effect in January, unless newly re-elected President Obama can reach a deal with Congress.

* Concerns about the euro zone also underpinned demand for fixed income assets, after European Central Bank president Mario Draghi sounded downbeat on the euro zone economy on Thursday and said he was ready to start new purchases of bonds. The ECB held rates steady as expected.

* The 10-year yield slipped 1 basis point to 0.730 percent, its lowest level since Aug. 3 and not far above its nine-year low of 0.720 percent touched several times in July.

* "I would say there's only a small chance that benchmark JGB rates will move as low as 0.70 percent, but whether they can rise from here depends to a large extent on the direction of U.S. Treasuries," said Ayako Sera, a market economist at Sumitomo Trust and Banking.

* Treasuries jumped on Thursday after a strong 30-year auction against the backdrop of fiscal concerns, though both 10-year and 30-year yields remained within their recent ranges.

* Ten-year JGB futures ended morning trade up 0.06 point at 144.56 after rising as high as 144.61, their highest level since July 25.

* The superlong sector continued to rise in the wake of solid demand at Thursday's 40-year auction, with yields on 30-year bonds losing 1.5 basis points to 1.900 percent, their lowest since Oct. 3.

Yields on 20-year debt fell 2 basis points to 1.640 percent, their lowest since Sept. 27.

* The spread between 10-year and 20-year yields shrank to 0.91 percentage point from 0.93 point on Oct. 30 on a last-traded basis, and some strategists say it could contract further as the yield curve flattens.

The 10/20 spread can return to 0.85 point, so the current level is attractive for establishing a flattener position, strategists at Barclays advised clients in a research note on Friday.

* The yield curve steepened at the end of last month as longer maturities underperformed due to concerns about possible issuance disruption if a deficit-financing bill needed to fund this fiscal year's budget failed to pass this month. But those concerns dissipated as the government and opposition parties appeared closer to an agreement on its passage.

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