JGBs rise a day after strong 10-yr sale; 30-yr sale eyed

Wed Dec 5, 2012 2:24am EST

Related Topics

* Futures gain after hitting 9 1/2 year high

* 10-yr, 30-yr yield spread hits highest since March 2008

By Lisa Twaronite

TOKYO, Dec 5 (Reuters) - Japanese government bond prices rose on Wednesday, pushing futures prices to a 9 1/2 year high, after a 10-year debt sale a day earlier attracted strong demand and U.S. Treasuries firmed overnight.

The 10-year JGB futures contract ended up 0.12 point at 144.99, touching a 9 1/2-year high of 145.01. Futures inched closer to their record high of 145.09, reached in June 2003.

Market participants say pressure is likely to resume on longer-dated maturities ahead of Thursday's auction of 700 billion yen 30-year bonds.

"Tomorrow's sale should be decent, because the superlong tenor has cheapened so much," said Tomohiro Miyasaka, an analyst at Credit Suisse in Tokyo.

The 30-year yield's spread over 10-year yields stood at 1.255 percentage points on Tuesday, its highest since March 2008, though it shrank slightly to 1.235 points on Wednesday.

Superlong maturities have underperformed ahead of Japan's election on Dec. 16, which is likely to usher in a new government. Shinzo Abe, leader of the main opposition Liberal Democratic Party (LDP) is the front-runner to be Japan's next prime minister and has called on the Bank of Japan to take more drastic easing steps.

Abe's suggestions included setting an inflation target of 2 percent, embarking on "unlimited easing", or even cutting interest rates to zero or below.

His proposals have lifted demand for short- and medium-term JGBs, while the yield curve has steepened as the superlong sector underperformed on fears the easing will lead to inflation.

BOJ Deputy Governor Kiyohiko Nishimura said on Wednesday the central bank will debate whether its monetary easing in September and October was enough to support the economy, which may be undershooting its projections.

Heizo Takenaka, an economist with close ties to the Liberal Democratic Party, told Reuters in an interview that Japan's next government should set a price target for the BOJ and the central bank should increase purchases of government debt to end deflation.

The 20-year yield as well as the 30-year bond yield both slipped half a basis point on Wednesday to 1.680 percent and 1.945 percent respectively.

JGBs gained despite a rise in investors' risk appetite that lifted the Nikkei average to a seven-month closing high on Wednesday.

The yield on the current 10-year cash bond slipped 1.5 basis points to 0.710 percent. The new issues offered at Tuesday's sale carried a 0.70 percent coupon, the lowest rate for 10-year paper since June 2003, but they still met strong demand.

"What do you do in a market like this? Short-term yields are too low, so investors buy 10-year debt," said a fixed-income fund manager at a Japanese asset management firm.

"Ahead of Japan's election, and with the U.S. fiscal deadlock keeping Treasuries well-bid, we can't expect much movement in JGBs," he said.

The five-year yield slipped half a basis point to 0.165 percent, matching its lowest level since June 2003 hit several times this year.

U.S. Treasuries prices firmed on Tuesday amid concerns about the U.S. budget deadlock. President Barack Obama proposed on Tuesday that tax rates could be lowered in 2013 with a broad U.S. tax code overhaul, but stood firm on insisting rates for the wealthiest must rise as part of a budget deal with Congress.

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