JGB's supported, 5-year yield hits record low

TOKYO Tue Jan 22, 2013 12:49am EST

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TOKYO Jan 22 (Reuters) - Japanese government bonds were mostly supported with the five-year Japanese government bond yield hitting a record low on Tuesday after the Bank of Japan announce it would commit itself to open-ended asset buying.

As expected, the Bank of Japan adopted a 2 percent inflation target and pledged to extend asset buying into 2014 with no time-limit.

The five-year debt yield fell to as low as 0.140 percent , the lowest yield recorded ever since Japan started issuing five-year bonds in 2000, and last stood at 0.145 percent, down 0.5 basis point on the day.

Yuya Yamashita, strategist at JPMorgan Chase, said some market player may be viewing the BOJ's open-ended commitment as an effective guarantee that low rates will stay for a long time, thereby helping medium-term bonds such as five-year bonds.

Still, its foray to a record low surprised many analysts, including Yamashita, as the yield could have risen because the BOJ did not cut its 0.10 percent interest on excess reserves.

Indeed, the benchmark three-month euroyen futures price fell 1.5 basis point to 99.765 as the BOJ did not cut the rate, which has served as a floor for all money market rates.

Still, JGBs were supported by expectations of more asset buying down the road given that the central bank is now committed to achieving 2 percent inflation -- something that has not happened in Japan for more than two decades.

"We'll have to see how hard the BOJ will press on the accelerator pedal from now on. If this means they always needed to do something until inflation rises to two percent, they would need to ease every month," said Katsutoshi Inadome, fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.

The 10-year JGB yield also dipped 0.5 basis point to 0.730 percent while the benchmark 10-year JGB futures price rose 0.04 point to 144.45.

On the other hand, longer maturities such as the 30-year have been pressured by concerns that bold BOJ steps could one day lead to inflation.

The 30-year bond yield rose 0.5 basis point to 1.970 percent , while the 20-year yield rose 1.5 basis point to 1.750 percent, boosting the 10-20 year yield spread to a record high of 102 basis points

The steepening in the yield curve also reflects mounting concerns about Japan's snowballing public debt, which amounts to more than 200 percent of its economy.

While a huge pool of Japanese private savings has helped spare Japan from the type of turmoil that hit indebted countries in Europe, many investors think Japan's funding capability could become more vulnerable in the future unless it can boost growth.

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