JGBs rise on expectations of more BOJ easing steps

Tue Jan 15, 2013 2:22am EST

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* 10-year yield marks biggest one-day drop since August
    * Yen's surge, after remarks by econ min, helps lift JGBs
    * Market sentiment improves but still negative - survey

    By Lisa Twaronite
    TOKYO, Jan 15 (Reuters) - Japanese government bond prices
rose on Tuesday, with the benchmark yield marking its biggest
one-day drop since August, as investors covered short positions
on growing expectations that the Bank of Japan will take more
easing steps as early as next week.
    A sharply stronger yen also gave the JGB market a lift,
after Economics Minister Akira Amari said excessive yen weakness
could have a negative effect on the country. His remarks helped
the yen rebound from a 2-1/2-year low against the dollar.
    The 10-year JGB yield fell 4 basis points to
0.770 percent, its lowest since Dec. 26. Last week, the yield
touched a 4-1/2-month high of 0.840 percent.
    "This is pretty much a short-covering rally," said Tadashi
Matsukawa, head of Japan fixed income at PineBridge Investments.
    He cited downward moves in U.S. and German yields when
Japanese markets were closed for a holiday on Monday, as well as
the growing market consensus that the BOJ will take more easing
steps next week. Benchmark 10-year Treasuries rose on Monday
after Federal Reserve Chairman Ben Bernanke offered no hints the
U.S. central bank would back away from its ultra-loose monetary
policy. 
    But Tuesday's rapid move down in JGB yields does not
necessarily presage a return to low rates, Matsukawa said, nor a
signal that the market endorses Prime Minister Shinzo Abe's aim
to push the BOJ to print more money.
    "The market moves very rapidly when expectations are high
and when we see the actual reality, then maybe it stops moving.
That's how the market behaves," he said.
    The dollar's downward correction against the yen also buoyed
the JGB market on Tuesday, he said. The dollar dropped as much
as 1 percent to 88.62 yen after Amari's remarks, moving
away from Monday's high of 89.67 yen. 
    
    BOJ Governor Masaaki Shirakawa said on Tuesday the central
bank would continue with powerful monetary
easing. 
    "The market has priced in additional easing by the BOJ next
week," said Naomi Muguruma, a senior fixed-income strategist at
Mitsubishi UFJ Morgan Stanley Securities.
    Sources close to the central bank said it would consider
expanding stimulus again and double its inflation target to 2
percent at its meeting on Jan. 21 and 22. The bank has been
under pressure from Abe for bolder action to beat deflation.
 
    "Some of the concerns about supply/demand deterioration have
been relieved, so now the focus is on the BOJ's monetary policy,
which encourages investors to buy JGBs on dips," Muguruma said.
    The benchmark 10-year JGB futures contract ended up
0.39 point at its session high of 144.14, its highest since Dec.
21.
    The yield on the 20-year bond fell 3 basis
points to 1.760 percent, moving away from its intraday high on
Friday of 1.805 percent, its highest since April 2012.
    The 30-year yield dropped 1.5 percent to
2.000 percent, moving away from its Friday session high of 2.025
percent, which was its highest since August 2011. 
    A weekly gauge of sentiment in the Japanese government bond
market improved in the latest week, supported by expectations of
more BOJ easing steps, but remained solidly in negative
territory, the latest Reuters poll showed on Tuesday.
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