JGBs up, 5-year yield hits 9 1/2-year low on election report

TOKYO Wed Dec 5, 2012 9:28pm EST

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TOKYO Dec 6 (Reuters) - Japanese government bonds ticked up on Thursday, with the five-year yield dipping to a 9-1/2-year low, as media reports that Japan's main opposition party is on course to win a solid majority in an upcoming election reinforced expectations of more aggressive monetary easing.

* The Liberal Democratic Party, whose leader Shinzo Abe has made bolder easing by the Bank of Japan as a pillar of his platform, is forecast to win an outright majority in the parliament after the Dec. 16 election, a Japanese media poll showed.

* Investors think any future easing is likely to involve further expansion of its asset purchase programme, which it conducts on top of its 1.8 trillion yen bond buying market operation.

* With the central bank already committed to buy more than one trillion yen of bonds with up to three years to maturity every month in that programme, traders think the BOJ may include longer bonds if it expands the asset purchase scheme.

* "There's a perception that the BOJ will have to extend the target of its asset purchase programme to five years, aside from whether it will do that this month or not," said a portfolio manager at a major Japanese bank.

* Many market players have also expected the BOJ to take easing steps in its next policy meeting on Dec. 19-20.

* The five-year bond yield fell 0.5 basis point to 0.160 percent, its lowest level since June 2003, when it hit a record low of 0.145 percent on the country's banking crisis.

* The 10-year JGB yield fell 0.5 basis point to 0.705 percent , also near 9 1/2-month low of 0.695 percent hit last week and again earlier this week.

* "The market's mood seems pretty strong. Bond yields could fall further if Japanese share prices fall from current highs," the portfolio manager said. The Nikkei share average hit a seven-month high on Thursday.

* The 10-year JGB futures rose 0.06 point in price to 145.05 , just below a record peak of 145.09 hit in June 2003.

* While the market's mood is strong, some analysts warn that JGB yields may have fallen too low, ignoring better-than-expected economic data in recent days.

* Data showed last week Japan's industrial output rose 1.8 percent in October, despite economists' forecast of a 2.2 percent drop, raising hopes Japan may avert a recession.

* "There are signs of improvement in the global economy and Japan's output seems to be on the mend. I think JGB yields are more likely to rebound from than not," said Katsutoshi Inadome, fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.

* Market players expect decent demand at an auction of 700 billion yen 30-year JGBs on Thursday. The Ministry of Finance closes the auction at noon (0300 GMT) and will announce the result at 12:45 p.m. (0345 GMT).

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