JGBs erase early rise as investors lock in gains

Tue Dec 11, 2012 2:22am EST

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* 10-yr March futures end down

* Losses limited by expectations of more BOJ easing steps

By Lisa Twaronite

TOKYO, Dec 11 (Reuters) - Japanese government bonds erased their early rise on Tuesday, with benchmark 10-year yields moving back away from a 9-1/2-year low hit last week as investors locked in gains.

Losses were limited by growing expectations of more monetary easing steps from the Bank of Japan.

"It was simple profit-taking after the superlong end outperformed toward the end of last week. On the futures contract, yesterday the front-month trading shifted to March, so there was probably some profit-taking in futures, too," said Naomi Muguruma, senior strategist at Mitsubishi UFJ Morgan Stanley Securities.

"I think people would like to decrease some risk positions before the election this weekend, and the 20-year JGB auction next week," she said.

The opposition Liberal Democratic Party is likely to secure a majority in Sunday's general election. LDP leader Shinzo Abe, who will probably be Japan's next prime minister, has repeatedly called on the BOJ to embark on more aggressive efforts to stimulate the economy and beat deflation.

The BOJ will likely take further monetary stimulus action at its meeting on Dec. 19-20, most likely by expanding its asset-buying and lending programme, currently at 91 trillion yen ($1.1 trillion). It could expand by another 5-10 trillion yen, according to sources familiar with the central bank's thinking.

The U.S. Federal Reserve is also expected to announce a new round of Treasury securities purchases at the conclusion of its two-day meeting that will begin later in the session. [ID:nL1E8N7DLU

"Further easing by the Fed is expected, but the BOJ will probably act no matter what the Fed does. Ahead of the BOJ meeting, Japan will hold an election, and the outcome will likely boost expectations of more BOJ easing next year," said a fixed-income fund manager at a Japanese asset management firm.

Yields on 10-year JGBs added half a basis point to 0.700 percent after dropping as low as 0.6900 percent earlier. Last week's yield of 0.685 percent was the lowest since June 2003.

Yields on benchmark cash bonds ended 2011 at 0.980 percent.

Ten-year JGB futures for March ended down 0.06 at 144.65 point after finishing the morning up 0.06 point at 144.77.

The 30-year sector outperformed in the morning, as brokers who abstained from buying at last week's 30-year auction covered short positions, market participants said.

Yields on 30-year JGBs initially fell 1.5 basis points to 1.880 percent, but they were later flat at 1.895 percent.

The 20-year yield added 1 basis point to 1.660 percent.

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