JGB market mood sours sharply ahead of election: Reuters survey

TOKYO Sun Nov 25, 2012 8:49pm EST

TOKYO (Reuters) - A weekly gauge of sentiment in the Japanese government bond market worsened to a level not seen in nearly five months on speculation of more aggressive monetary easing following a likely change in the government after an election next month.

The weekly poll's JGB bull-bear diffusion index, calculated by subtracting the number of bearish market players from those who are bullish, came in at minus 33, falling sharply from minus 6 in the previous week's poll.

The latest reading was the lowest since minus 61 marked in early July.

The market has been betting on a bolder monetary easing by the Bank of Japan as the main opposition leader Shinzo Abe, a front-runner to win the election on December 16, called for a higher inflation target and unlimited easing -- so called "Abe trade" as investors also bet on a cheaper yen and higher Japanese shares.

As a result, the yield curve has been steepening as shorter maturities held firm while superlong maturities underperformed on future inflation as well as concerns about more public spending by a new government.

The median forecast for the 10-year JGB yield for the end of this week was 0.748 percent, above Friday's closing level of 0.735 percent.

"We are likely to continue to see bets on the election. There could be duration extension (by pension funds) but next week's auctions of 10- and 30- year bonds will be weighing on markets. The curve will continue to steepen," said a fund manager at an asset management firm.

The spread between 10- and 20-year yields rose to as high as 95 basis points, its highest level since 1999. The 20-year bond yield stood at 1.675 percent at the end of last week, not far from its peak of 1.700 percent hit three times in recent months.

On the other hand, the 10-year benefited from firmness in shorter maturities, with its yield still near a nine-year low of 0.720 percent hit in July, though few players see room for a further fall in yields.

The online survey of 94 JGB market participants from major institutions received 36 responses, for a response rate of 38.3 percent. These included 17 responses from "real money" investors from institutions such as banks, pension and investment funds and insurance companies.

The survey was conducted from Thursday to 8:00 a.m. on Monday (6 p.m. EST on Sunday).

(Reporting by Yoshiyasu Shida; Writing by Hideyuki Sano; Editing by Jacqueline Wong)

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