JGBs drop ahead of 20-year sale, election expectations

Wed Nov 14, 2012 2:28am EST

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By Lisa Twaronite

TOKYO, Nov 14 (Reuters) - Japanese government bond prices fell on Wednesday as investors sold ahead of Thursday's 20-year sale, with longer maturities also pressured late in the session by Prime Minister Yoshihiko Noda said he was willing to dissolve parliament this week.

Noda said in a parliamentary debate he would dissolve the lower house on Nov. 16, clearing the way for a general election next month, if the opposition agreed to carry out electoral reform. Shinzo Abe, leader of the main opposition Liberal Democratic Party, agreed to the demand.

Many market participants expect Noda's party to be voted out of power in the election, with a new LDP-led government seen as more aggressive in putting pressure on the Bank of Japan to raise its inflation target.

"It is bearish, for obvious reasons - the prospect of economy-friendly campaign 'pledges' and the possibility of a more reflationary LDP coming back to power," said Neale Vincent, strategist at Nomura Securities in Tokyo.

The 10-year JGB futures contract ended down 0.07 point at 144.47, after moving in a tight 144.45-144.53 range throughout the day. After Noda's statement, the contract was down 0.09 ticks at 144.38 in after-hours trade.

In cash trading, the 10-year yield rose 1.5 basis points to 0.745 percent, gaining half a basis point late in the session.

The yields on 30-year bonds, the most sensitive to political concerns, were flat for most of the day but rose one basis point to 1.910 percent after Noda's remarks.

Yields on 20-year debt also added a basis point to 1.655 percent ahead of Thursday's offering of 1.2 trillion yen of 20-year notes.

"The 15-year to 20-year JGB sector is very cheap on the curve, and tomorrow's auction provides a good chance to buy, either against the wings, or against swaps," Vincent said.

"If you want to combine the two, you can buy against swap wings," he said, referring to the position of buying 20-year JGBs against paying 7-year and 25-year swaps.

JGB investors' attention turned back to domestic concerns after focusing on the U.S. fiscal crisis, which many say could pressure yields in the coming weeks.

Debate on the U.S. "fiscal cliff" resumed on Tuesday with the White House saying it was ready to negotiate with Republicans on taxes and spending. But a spokesman for President Barack Obama said he will keep insisting that tax rates on the wealthy must rise in 2013.

"The market is watching developments in the U.S. which could keep U.S. Treasuries well-bid and support JGBs," said a fixed-income fund manager at a Japanese trust bank.

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