JGBs firm, bolstered by expectations of more BOJ easing

Mon Dec 10, 2012 2:06am EST

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* 10-yr futures rise ahead of Dec contract expiry on Tuesday

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By Lisa Twaronite

TOKYO, Dec 10 (Reuters) - Japanese government bonds mostly firmed on Monday, with benchmark 10-year yields moving back towards a 9-1/2-year low hit last week on expectations for more monetary stimulus from the Bank of Japan.

Underpinning bonds, revised government data released on Monday showed Japan's economy contracted for a second straight quarter in the July-September quarter, confirming a mild recession.

JGBs will likely tread water this week ahead of a national election on Dec. 16, with the majority of respondents to this week's market poll expecting yields to move sideways.

"People are in wait-and-see mode, so we don't expect a lot of movement at these levels," said Le Ngoc Nhan, a strategist at Morgan Stanley MUFG Securities in Tokyo.

"Looking ahead, people expect inflation only in the very, very far future. The general trend now is that people want to take the steepening precisely because of more aggressive monetary easing by the BOJ," he said.

JGB investors are also awaiting the outcome of the U.S. Federal Reserve's two-day meeting ending on Wednesday. The Fed is also expected to announce a new round of Treasury securities purchases, and to eventually adopt numerical thresholds for inflation and unemployment levels, according to the latest Reuters poll.

ELECTION BETS

JGBs gained last week after Japanese media polls showed the opposition Liberal Democratic Party was on track to secure a majority in the election. LDP leader Shinzo Abe, likely to be the country's next leader, has called for more aggressive stimulus from the Bank of Japan.

The central bank might even take further easing steps at its final rate review for this year on Dec. 19-20. BOJ Deputy Governor Kiyohiko Nishimura said last week the central bank would debate whether further stimulus is needed to support the economy.

"JGB yields are pricing in more easing, but not pricing in the expectation that the easy policy will have much effect anytime soon," said a fixed-income fund manager at a Japanese asset management firm.

Yields on 10-year JGBs shed 1 basis point to 0.695 percent. On Thursday, they fell to 0.685 percent, their lowest level since June 2003.

Yields on benchmark cash bonds ended 2011 at 0.980 percent.

Ten-year JGB futures added 0.11 point to end at 145.19, moving close to Thursday's intraday high of 145.26, which was the highest level ever for 10-year futures. The lead contract ended 2011 at 142.41.

The December contract will expire on Tuesday. The March contract rose 0.07 point to 144.71. Volume was moderately strong, with 22,941 December contracts trading, topped by 23,011 March contracts.

The superlong sector lagged slightly after gaining late last week in the wake of a strong 30-year auction. The 20-year yield added 1 basis point to 1.655 percent, while the yield on 30-year JGBs was flat at 1.890 percent.

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