Benchmark JGB yield hits 9 1/2-yr low on U.S. fiscal woes

Wed Nov 28, 2012 2:17am EST

Related Topics

* U.S. budget concerns, China worries, month-end buying hopes support market

* Market players see 10-year yield dipping below 0.7 pct

* Superlongs under pressure, 10-20 year spread matches 13-yr high

By Hideyuki Sano

TOKYO, Nov 28 (Reuters) - Japanese government bond prices gained on Wednesday, with the benchmark 10-year bond yield hitting a 9-1/2-year low, as investors worried about lack of progress in negotiations to avert a fiscal crisis in the U.S. sought safe-haven debt.

But longer maturities failed to maintain gains, lifting the 10- and 20-year yield spread to match a 13-year high hit last week on speculation of radical monetary easing after a likely change in the Japanese government after an election next month.

The current 10-year cash JGB yield fell 1.5 basis point to 0.715 percent, breaking below its July trough of 0.720 percent, which has been a strong resistance since then.

The benchmark 10-year JGB futures price rose 0.17 point to 144.79, briefly rising to 144.80, their highest level since June 2003, when they hit a record high of 145.09.

The latest catalyst for gains was concern over the U.S. "fiscal cliff" as U.S. lawmakers remained deadlocked over how to ease the likely shock from $600 billion of fiscal tightening due to kick in early next year.

Investors also had lingering concerns over the strength of the Chinese economic recovery as shares in Shanghai hit a near four-year low.

"Although recent Chinese economic data is showing signs of improvement, Shanghai share prices seem to suggest that it is still far from a full-fledged recovery," said Takeo Okuhara, fund manager at Daiwa SB Investments.

"Given dimming hopes of a strong recovery in the U.S., China and Japan, bonds are likely to gain further. I expect the 10-year yield to dip below 0.7 percent by December," Okuhara added.

On top of global factors, JGBs were also supported by hopes of month-end buying by pension funds.

Nonetheless, superlong bonds, such as 20- and 30-year bonds, failed to keep up with shorter maturities because of speculation of aggressive easing by the Bank of Japan after the Dec 16 election, where the main opposition party is expected to win.

Its leader Shinzo Abe, seen as a front-runner to become prime minister after the poll, is calling for setting a higher inflation target and more buying by the central bank of government debt to finance public works.

At the moment, investors doubt whether Abe's proposals -- which have already drew criticism from business leaders and some of his possible coalition partners -- will be adopted, and on whether such steps can actually boost inflation expectations.

Yet his ideas have made many investors reluctant to buy superlong bonds, also because Abe would be able to pick a new central bank chief and two deputies next March-April, when the current governor and deputy governors term will expire, if he wins the election.

"We are still at the first act of the drama. The second act will open after the election when he will form a government. And there will be the third act when he will look for the next BOJ governor," said Mari Iwashita, chief market economist at SMBC Nikko Securities.

The 20-year bond yield was flat at 1.665 percent , pushing up the spread over the 10-year yield stood to 95 basis points, matching a 13-year high hit last week.

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