Benchmark JGBs steady despite Nikkei rally

Tue Dec 25, 2012 1:15am EST

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* Trading volume on 10-year JGB futures hit lowest this year

* Yields on benchmark 10-year unchanged at 0.760 pct

TOKYO Dec 25 (Reuters) - Benchmark 10-year Japanese government bond yields were unchanged on Tuesday, supported by month-end demand and expectations of more monetary easing by the central bank, though investors' strong risk appetite pushed the Nikkei sharply higher.

Yields on 10-year JGBs were unmoved at 0.760 percent, while the Nikkei share average climbed 1.4 percent, led by exporters as the yen hit a 20-month low against the dollar after Japan's incoming prime minister stepped up pressure on the BOJ to ease monetary policy.

Ten-year JGB futures slipped 12 ticks to 143.92 in thin trade, with 10,426 contracts changing hands, their lowest this year.

"Given the Nikkei's sharp rise, the JGB market is well supported," said Naomi Muguruma, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.

"The reason is that we are approaching the end of the month. Usually some index-based investors need to purchase long-term JGBs to match their asset duration to the index," he said.

"Plus, continuous expectations of BOJ monetary easing are also supportive of the short- to medium-term sectors."

Incoming Prime Minister Shinzo Abe and his coalition partner agreed on Tuesday to set an inflation target of 2 percent and compile a large stimulus budget to help the economy return to growth and overcome deflation, the head of the coalition partner said.

Yields on 30-year bonds dipped 0.5 basis point to 1.925 percent, while those on 20-year bonds added 0.5 basis point to 1.175 percent.

Benchmark JGBs have lost 4.9 percent in 2012 in dollar-based terms, according to Reuters data.

"Supply/demand factors are likely to weigh down JGB markets until mid-January, when the details of the supplementary budget will be known, but we do not expect any genuine shift in the yield range given monetary easing expectations," Barclays Securities said in a note. "We believe the defense line will remain 0.7 percent for 10-year bonds through the beginning of the new year."

It expected yields on the benchmark 10-year bonds to trade within a range of 0.70 to 0.80 percent for the next few months, as global economic growth would not accelerate in the first half of 2013 given the fiscal austerity in major economies, it said.

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