JGBs erase losses after strong 10-yr bond auction

Tue Dec 4, 2012 1:56am EST

Related Topics

* New 10-yr bonds attract solid demand despite low coupon

* Investors opt for 10-yr bonds as shorter yields too low

* Superlongs under pressure, yield curve steepest since 1999

By Hideyuki Sano

TOKYO, Dec 4 (Reuters) - Japanese government bond prices ended flat on Tuesday, having erased earlier losses after an auction of new 10-year debt attracted strong demand despite its low coupon rate.

On top of the prospects of a recession in the Japanese economy, JGBs were also supported by expectations that a likely change in the Japanese government in the Dec. 16 election could lead to more aggressive easing by the Bank of Japan.

The 10-year JGB futures fell ended flat at 144.87, a whisker off the 9 1/2-year high of 144.91 hit on Monday. The current 10-year bond yield was flat at 0.700 percent .

"At the moment, the new issue does not look cheap on the yield curve. But I do expect its yield to fall to around 0.7 percent," said Keiko Onogi, senior JGB strategist at Daiwa Securities.

The Finance Ministry sold 2.3 trillion yen ($28 billion) of fresh 10-year bonds at a highest yield of 0.732 percent in an auction, a slightly lower yield than market expectations.

Although the issue had the lowest coupon rate for 10-year paper since June 2003, at 0.7 percent, that did little to weaken demand.

Investors such as Japanese regional banks are thought to be stepping up buying in the 10-year tenor in recent months, as yields on five-year bonds, their bread-and-butter portfolio, have fallen to paltry levels, analysts said.

"The auction confirmed investors' strong demand. Some investors have no choice but to buy beyond the five-sector to earn income gains," said Yuya Yamashita, rates strategist at JPMorgan.

The five year yield stood at 0.170 percent, near the nine-year low of 0.165 percent touched twice earlier this year.

Opposition leader Shinzo Abe, a front-runner to become prime minister after the Dec 16. election, has called for unlimited monetary easing to achieve inflation of two percent, triggering falls in short and medium-term bond yields.

There remain doubts on exactly how far Abe can change BOJ policy, given that the BOJ is already buying a large amount of bonds.

But his proposals have pushed the yen down, lifted Japanese share prices and made investors reluctant to buy longer maturities such as 20- and 30-year bonds, which would fare badly if a were adopted that boosted inflation along with the economy.

The 20-year yield rose 1.0 basis point to 1.685 percent . Its spread over the 10-year yield rose to 98.5 basis points, near a record high of 101 basis points in hit in June 1999.

The 30-year bond yield also rose 0.5 basis point to 1.950 percent, as the market braced for an auction of 700 billion yen ($8.5 billion) 30-year bonds on Thursday.

"At the moment, I can't see the end in the steepening. Superlongs are likely to keep underperforming for now," said Daiwa's Onogi.

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