JGBs firm, curve flattens ahead of expected pension demand

Mon Nov 26, 2012 1:56am EST

Related Topics

* Superlongs up on bargain-hunting after sharp steepening

* Futures snap four-day losing streak

* Bond investors think BOJ expectations have gone too far

By Hideyuki Sano

TOKYO, Nov 26 (Reuters) - Japanese government bond prices firmed on Monday, with the longest maturities snatched up on bargain-hunting after their underperformance in the past week and ahead of likely month-end buying by pension funds.

Expectations that main opposition party leader Shinzo Abe, seen as a front-runner to become prime minister after an election next month, will push for radical monetary easing had undermined "superlongs" such as 20-, and 30-year bonds.

"Market expectations had gone way ahead of reality. Even if Abe wins, there's only so much he can do. Setting an inflation target is one thing. Achieving it is another thing," said a fund manager at a Japanese asset management firm.

A series of Abe's proposals -- including setting a higher inflation target and sub-zero interest rates -- have sparked a sell-off in the yen, a rally in Japanese shares and a steepening in the JGB yield curve.

As the spread between 10- and 20-year yields rose to 95 basis points last week, highest level since 1999, some bargain-hunting kicked in in the 20- and 30-year sector on Monday.

The 30-year yield fell 1.5 basis point to 1.935 percent and the 20-year yield also fell 1.5 basis point to 1.670 percent.

They were also helped by expectations of month-end duration extensions by pension funds. They often buy long-dated bonds to extend their portfolio's duration to match the index.

"If they are going to ease, they will have to buy a lot of JGBs. So essentially the market is fairly supported," said Tadashi Matsukawa, head of fixed income investment at PineBridge Investments in Tokyo.

The benchmark 10-year bond yield was flat at 0.735 percent on Monday, near a nine-year low of 0.720 percent hit in July.

The 10-year JGB futures rose 0.06 point to 144.60, snapping their four-day losing streak, despite a rise in Japanese share prices on Monday. Japan's Nikkei share average closed at a 7-month high.

Unwinding of recent steepening bets also pushed down the three-month euroyen futures to 99.760 from seven-year high of 99.770 hit first on Wednesday and again on Thursday and Monday.

"Many bond market players think the latest rise in Japanese shares is a bit excessive. It's not like investors are drastically shifting their portfolio in favour of stocks over bonds," said Naomi Muguruma, senior bond strategist at Mitsubishi UFJ Morgan Stanley Securities.

Many bond fund managers in fact doubt how much change Abe can bring to the BOJ's policy and to the economy.

"At the moment, Japanese shares are up, the yen is down and bonds are supported. It is a dream world for Japan. But you cannot be in a situation like this forever," said the manager at the Japanese asset management firm.

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