JGBs under pressure as 10-year yield inches up to 2-month high

TOKYO Wed Dec 26, 2012 9:26pm EST

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TOKYO Dec 27 (Reuters) - Benchmark Japanese government bonds slipped on Thursday, with the 10-year yield edging up to a more than two-month high on expectations that the new government of Premier Shinzo Abe will push for more aggressive fiscal and monetary stimulus.

* Undermining demand for bonds, Japan's Nikkei share average climbed to a 21-month high on Thursday, led by exporters, as Abe's vow to battle deflation pushed the yen to a more than two-year low against the dollar.

* Japan's new Finance Minister Taro Aso said on Thursday that Abe has ordered him to compile a stimulus package without adhering to a previously agreed cap on new bond issuance.

Japan's previous government agreed to limit new bond issuance to 44 trillion yen ($519 billion), to help prevent the country's public finances from deteriorating.

* "Aso didn't say anything unexpected, and I think most market participants are already bracing for more issuance next year as the new government carries out its pledge for massive fiscal stimulus," said a fixed-income fund manager at a Japanese asset management firm in Tokyo.

"In the short-term, the question is whether the 10-year yield will break support at 0.80 percent today or tomorrow, ahead of the long New Year's holiday in Japan," he added.

* Japanese markets will end 2012 trading on Friday, and reopen on Jan. 4.

* The 10-year yield added 1 basis point to 0.795 percent, its highest level since Oct. 18. Benchmark yields last touched the 0.80 threshold on Sept. 21.

* The benchmark 10-year JGB futures contract ended morning trade down 0.12 point at 143.54, just one tick above its session low, which was the lowest level since Sept. 18.

* Superlong maturities were untraded so far on Thursday.

* JGBs have lost 5.7 percent in 2012 in dollar-based terms, according to Reuters data.

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