JGBs drop as stocks soar, though dip-buying limits losses
* Life insurers said to buy in superlong sector
* BOJ seen likely to take further easing steps
By Lisa Twaronite
TOKYO, Dec 19 (Reuters) - Surging stock prices helped push benchmark Japanese government bond yields to a nearly 7-week high, though market participants said some dip-buying emerged to limit losses.
Japan's Nikkei stock average jumped 2.4 percent to end above 10,000 for the first time in more than eight months, as the yen hit a 16-month low against the euro and traded near a 20-month low against the dollar.
Yields on cash 10-year JGBs added 2.5 basis points to 0.780 percent, their highest level since Nov. 2.
"Equities are up more than 2 percent and we continue to see yen weakness," Tadashi Matsukawa, head of Japan fixed income at Pinebridge Investments in Tokyo.
"However, there is a BOJ meeting tomorrow, and also there is a big JGB redemption coming in tomorrow, so it seems that there is also very good dip-buying, especially in the 5-6 year sector," he said.
On Wednesday, the Bank of Japan began its regular two-day policy meeting at which sources said it will decide to take further easing steps. It will also consider adopting a 2 percent inflation target no later than in January in response to calls from the incoming prime minister, Shinzo Abe, for the bank to make stronger efforts to beat deflation.
JGBs also faced pressure from a drop in U.S. Treasury prices on signs of progress in resolving the U.S. "fiscal cliff" budget crisis sapped demand for safe-haven fixed income assets.
Negotiations in Washington to avert the tax hikes and spending cuts appeared to be moving toward a deal as House of Representatives Speaker John Boehner kept the support of his Republican colleagues for compromises in talks with President Barack Obama.
"JGBs have moved on domestic factors recently, but they've also tracked the uptrend in yields on U.S. Treasuries, particularly as Japanese equities have soared with the 'risk-on' mood," said a fixed-income fund manager at a Japanese asset management firm.
On the data front, Japan's exports fell in November from a year earlier to mark the sixth straight month of declines, bolstering the case for the BOJ to muster further monetary stimulus.
Fourteen of 19 economists polled by Reuters last week said they expected the BOJ to ease, most likely by increasing its 91 trillion yen ($1 trillion) asset buying and lending programme by up to 10 trillion yen.
"We will likely see some profit-taking on yen short positions and equity long positions in the short term, so even if the BOJ doesn't do anything tomorrow, I think JGBs should be supported in the short term," said Pinebridge Investment's Matsukawa.
Abe's Liberal Democratic Party swept to power in Sunday's lower house election after he called for massive fiscal spending to revive the economy and "unlimited" monetary easing to achieve price rises.
"As JGB markets have now discounted the election results to a good extent, we should be aware of any signs that the yield uptrend may have reached an end at 10-year yields of around 0.75 percent-0.80 percent," said Chotaro Morita, chief fixed income strategist at Barclays, in a note to clients.
An auction on Tuesday of 20-year government bonds met tepid demand, as investors shunned the superlong debt on concerns that Abe's policies will lead to inflation in the long term, which erodes the appeal of fixed-income assets. But Japanese life insurers were said to be bargain-hunting on Wednesday, so that zone fared better than the 10-year sector.
Yields on 20-year bonds rose 1 basis point to 1.745 percent after earlier rising to 1.750 percent, their highest since early April. Yields on 30-year bonds added half a basis point to 1.985 percent.
The 10-year JGB futures contract fell for a fifth consecutive session, losing 0.11 point to 143.88, after falling as low as 143.70, its lowest since Sept. 20.
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