Yen pressured by widening yield spread between JGBs, Treasuries

Fri Jan 4, 2013 5:48am EST

Related Topics

* U.S./Japan benchmark yield spread at widest since April

* Yen sinks to lowest level vs dollar since July 2010

By Lisa Twaronite

TOKYO, Jan 4 (Reuters) - A sharp rise in benchmark Japanese government bond yields on Friday was overshadowed by an even sharper rise in U.S. Treasury yields and diverging monetary policy outlooks could push the spread wider still.

The shifts in the yields helped push the dollar to its highest level against the yen in nearly two and a half years and with the spread expected to swell, the yen could face more pressure, analysts said.

Tokyo markets reopened on Friday after the long New Year's holiday with expectations that 2013 will bring more fiscal and monetary stimulus measures in Japan. By contrast, the U.S. monetary outlook grew less clear after the release on Thursday of the minutes of the Federal Reserve's December meeting.

While the Fed looks set to continue buying bonds, some policymakers appeared wary of increasing the U.S. central bank's $2.9 trillion balance sheet.

The minutes fuelled a selloff in Treasuries, pushing 10-year yields on Friday above 1.929 percent in Asian trade, their highest level since May.

"The market expected the Fed to buy about half of the new issuance of Treasuries this year, and the minutes contained words that made some investors completely rethink their supply/demand expectations," said Hiroki Shimazu, senior market economist at SMBC Nikko Securities.

The 10-year JGB yield gained 4 basis points to 0.835 percent, its highest level since Sept. 13.

While the move marked its biggest one-day basis-point move since Aug. 7, the spread between U.S. and Japanese gapped to about 110 basis points, its widest since April 2012.

"The U.S. might be going into exit mode much earlier than people thought, as opposed to the BOJ, which is a lap or two behind," said Shogo Fujita, chief Japanese bond strategist at Bank of America in Tokyo.

"It's feeding from both sides -- the base money effect, as the BOJ increases the money supply even further than the Fed in the next few months, and also the fact that the Fed may be stopping its increasing of the monetary base within the next 12 months, as the BOJ continues to go on -- this will obviously drive the interest rate side," he said.

Fujita said the U.S./Japan yield spread could widen further on expectations that the U.S. economy will shift into a sustainable recovery towards the end of the year. Fujita predicted the spread could widen to 150 basis points by the middle of 2013.

The spread was as narrow as 70 basis points as recently as July, when Europe's debt woes sent yields in that region soaring, and investors flocked to the perceived relative safety of both U.S. and Japanese sovereign debt.

A widening U.S./Japan yield spread adds to pressure on the yen, which was fetching 88.20 per dollar on Friday, after sinking as low as 88.34 yen, its deepest nadir since July 2010. That followed the dollar's dramatic 12.8 percent rise against the Japanese currency in 2012, its biggest yearly percentage rise since 2005.

Investors are betting that the new government of Prime Minister Shinzo Abe will push to weaken Japan's currency and implement aggressive stimulus, and lean on the BOJ to do the same.

Abe has called on the Bank of Japan to set a 2 percent inflation target, and has also vowed to select someone who shares his views on drastic stimulus to succeed BOJ Governor Masaaki Shirakawa, whose term expires in April.

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