Benchmark JGBs steady ahead of this week's sales

Mon Dec 3, 2012 2:42am EST

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By Lisa Twaronite

TOKYO, Dec 3 (Reuters) - Japanese government bonds steadied on Monday ahead of auctions of longer maturities later this week, with benchmark yields staying above a 9-1/2-year low touched on Friday.

But the yield curve continued to steepen ahead of a general election on Dec. 16. Shinzo Abe, leader of the main opposition Liberal Democratic Party (LDP) and the front-runner to be the next prime minister, has called on the Bank of Japan to take more drastic easing steps. This has pressured the yen, as well as prices of superlong JGBs on inflation concerns.

Yields on 20-year bonds and 30-year bonds both rose 1 basis point to 1.680 percent and 1.950 percent respectively, though both were down half a basis point from their session highs.

"In the short term, the long end is the easiest part of the curve to move," said Neale Vincent, strategist at Nomura Securities in Tokyo.

"But if investors are right about the long end selling off on reflationary policies, the middle of the curve is going to get hurt, too. The central bank may have to buy a lot of bonds to achieve the inflation, but returns on the sub-6-year sector are going to look very unattractive if policy even half works," he said.

Vincent said he favours trades such as payer spreads based on the idea that the middle of the yield curve will stay strong well into next year, but then re-price when the BOJ eventually turns more neutral.

BOJ Governor Masaaki Shirakawa on Monday said that the central bank is committed to loosening monetary policy aggressively on condition there is no substantial risk to sustainable economic growth.

The benchmark 10-year JGB futures price ended up 0.01 point at 144.87 after earlier rising to 144.91, its highest level since June 2003. Futures are not far from their record high of 145.09, also hit that month.

The current 10-year cash JGB yield was flat at 0.705 percent, down from a session high of 0.710 percent, and holding above Friday's intraday low of 0.695 percent. That was its lowest level since June 2003 and the first time since then that it fell below 0.70 percent.

The Ministry of Finance will offer 2.3 trillion yen of 10-year bonds on Tuesday and 700 billion yen of 30-year bonds on Thursday.

"There are people who want to buy at the 10-year auction, even with yields at these low levels," said a fixed-income fund manager at a Japanese trust bank.

"Ahead of the election, we are probably not going to see any big movements in JGBs," he said.

A weekly gauge of sentiment in the Japanese government bond market remained negative but showed a slight improvement, with benchmark yields expected to stay in recent ranges ahead of this week's auctions.

Undermining the appeal of bonds, data released early in the session showed Japanese companies increased spending on plant and equipment in the July-September quarter, rising for a fourth consecutive quarter.

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