JGB curve steepens on election bets, super-longs suffer

Fri Nov 16, 2012 1:58am EST

Related Topics

* Super-longs hit by LDP's reflationary policy proposals

* The 10-20 year yield spread widest since 1999

* Short-term maturities gain on speculation of more easing

* Some say "Abe trade" will not last long

By Hideyuki Sano

TOKYO, Nov 16 (Reuters) - Long-dated Japanese government bond prices fell while shorter maturities eked out gains on Friday on speculation that a likely change in the country's government could lead to more aggressive easing in monetary and fiscal policy.

Since Japanese Prime Minister Yoshihiko Noda signaled earlier this week he would call an election on Dec. 16, longest maturities suffered the most, pushing up the yield spread between the 10- and 20-year paper to the highest level since 1999.

"Expectations of more monetary easing and loosening in fiscal discipline are in the play at the moment," said Akihiko Inoue, chief fixed income strategist at Mizuho Investors Securities.

The conservative Liberal Democratic Party, seen as likely to return to power, has called for more public spending and its leader Shinzo Abe said on Thursday he wanted the BOJ to consider zero or sub-zero interest rates.

The 20-year yield climbed 1.5 basis point to 1.685 percent , near the 1.7 percent level where it peaked three times in the past half year.

Its spread over the 10-year yield rose to 95.5 basis points, a lofty level not seen since July 1999, having risen four basis points in the past few days.

The 30-year yield also gained 1.5 basis point to 1.950 percent, near seven-month high of 1.960 percent hit last month.

On the other hand, yields on short-dated notes fell, with the five-year bond yield falling 1.0 basis point to 0.175 percent, edging near a nine-year low of 0.165 percent hit in August.

Benchmark euroyen futures briefly hit a four-month high of 99.755 as Abe's comments sparked speculation that the BOJ may scrap 0.10 percent interest payments on excess reserves, which has effectively served as a floor for money markets.

The price of 10-year JGB futures, which in reality track the cheapest to deliver seven-year zone, rose 0.11 point to 144.70, briefly hitting a nine-year high of 144.73.

Caught between firm short- to medium-term notes and fragile longer bonds, the 10-year yield stood flat at 0.730 percent , unable to test its previous trough of 0.720 percent hit in July at the height of European debt crisis.

"Everybody agrees that the curve will have to steepen. But the direction of the market is uncertain," said a fund manager at a Japanese bank.

"The election story will become stale soon, perhaps next week. Nonetheless, if Japan is to become the only country in the world to ease both monetary and fiscal policy, then this could become a big trend," he added.

Others think the latest market fad of bond steepening, yen selling and Japanese stock buying, already dubbed as "Abe trade", will not last long and JGBs will soon return to their regular habit of tracking U.S. bonds.

"People are doing this for a short-term trading purpose. In the long-run, given the U.S. fiscal cliff and concerns about Europe, bonds will be supported," said Takeo Okuhara, fund manager at Daiwa SB Investments.

Many market analysts also caution that it is far from assured whether the BOJ cuts rates to zero despite the call from Abe. BOJ Governor Masaaki Shirakawa has openly opposed the idea, saying that zero rates will kill money markets.

Some Japanese banks don't seem to believe in that scenario, said a trader at a Japanese brokerage.

"Big banks were selling three- and four-year sectors quite a lot. No one thinks the BOJ will scrap interests on excess reserves," he said.

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.