Benchmark JGBs erase gains; BOJ easing expectations lend support

Wed Jan 9, 2013 2:21am EST

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* Longer maturities remain firm, with 30-year sale in focus
    * MOF to meet with JGB investors, primary dealers on Thurs

    By Lisa Twaronite
    TOKYO, Jan 9 (Reuters) - Benchmark Japanese government bond
prices backed away from earlier gains on Wednesday, with yields
creeping back towards a 4-1/2-month high struck this week, as
stocks pushed higher and took away some of the appeal of
fixed-income assets.
    But expectations of more easing by the Bank of Japan
underpinned sentiment, and the recently battered superlong tenor
held up on bargain hunting even before a 30-year sale scheduled
for Thursday.
    The BOJ will consider easing monetary policy again at its
Jan. 21-22 meeting as it eyes doubling its inflation target. Any
easing will likely take the form of another increase in its 101
trillion yen ($1.2 trillion) asset buying and lending programme,
mostly for purchases of government bonds and treasury discount
bills, according to sources familiar with BOJ thinking.
 
    Robust demand at the previous session's 10-year JGB sale
also underpinned sentiment, market participants said.
    "For sure, I think sentiment is turning positive right now,"
said Le Ngoc Nhan, a strategist at Morgan Stanley MUFG
Securities in Tokyo. 
    "But I wouldn't bet on a (10-year JGB) rally back to 70
basis points, where we were before this sell-off started. I
don't think we'll go back to that level again," he said.
    Benchmark yields dropped as low as 0.685 percent on Dec. 6,
their lowest level since June 2003. Nhan said he still forecasts
the 10-year yield will gradually rise to 0.95 percent by the end
of March.
    On Wednesday, the 10-year JGB yield inched up
half a basis point to 0.825 percent, moving back towards
Monday's high of 0.840 percent, after dropping as low as 0.810
percent earlier in the session.
    The benchmark 10-year JGB futures contract ended
flat at 143.43, after rising to a session high of 143.67 in the
morning.
    JGBs took some direction from equities markets, with the
Nikkei share average bolstered by hopes of aggressive easing by
the BOJ later this month. The Nikkei has rallied nearly
22 percent over the past two months, and added another 0.7
percent on Wednesday.
    Longer maturities, recently under pressure amid concerns
about the new Japanese government's aggressive reflationary
stance, firmed on Wednesday.
    The Ministry of Finance is scheduled to hold regular
meetings with JGB investors and primary dealers on Thursday, to
discuss how it will allocate this year's additional issuance of
JGBs.
    "I think the market consensus is that the Ministry of
Finance needs to issue maybe 7 to 8 trillion yen in additional
JGBs," said Naomi Muguruma, a senior fixed-income strategist at
Mitsubishi UFJ Morgan Stanley Securities.
    Investors are concerned that the superlong tenor will bear
the brunt of the new issuance, which pushed up the yield curve
towards the end of last month. But some bargain hunters overcame
these concerns, particularly when the 30-year yield rose above 2
percent on Tuesday for the first time since December 2011.
    Yields on 20-year bonds gave up 1 basis point
to 1.785 percent, while those on 30-year bonds 
fell 1 basis point to 2.00 percent.
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