JGBs bolstered after BOJ easing, 5-year yield hits record low

Tue Jan 22, 2013 1:45am EST

Related Topics

* BOJ extends asset buying into 2014, sets no time limit

* Investors look to future easing pace after 2 pct inflation target

* Euroyen futures price slip after no interest rate cut

* "Superlongs" continue to suffer

By Hideyuki Sano

TOKYO, Jan 22 (Reuters) - Japanese government bonds rose on Tuesday and the five-year bond yield hit a record low after the Bank of Japan announced it would commit itself to open-ended asset buying and doubled its inflation target to 2 percent.

But longest maturities remained under pressure, with 20- and 30-year bond yields rising, hurt by concerns about the long-term impact of such bold money-printing and Japan's ever-increasing public debt.

The BOJ pledged to extend asset buying into 2014, with no time-limit and an initial plan to buy 13 trillion yen in mostly short-term bills in that year.

The five-year debt yield fell to as low as 0.140 percent , the lowest recorded since Japan started issuing 5-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 players may be viewing the BOJ's open-ended commitment as an effective guarantee that rates will remain low for a long time, thereby helping medium-term bonds such as five-year bonds.

Still, its move 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, which has served as a floor for all money market rates.

As a result, the benchmark three-month euroyen futures price fell 1.5 basis point to 99.765 on disappointment.

Still, JGBs were underpinned 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 2 percent, they would need to ease every month," said Katsutoshi Inadome, fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.

In addition, many investors expect Prime Minister Shinzo Abe to appoint a policy dove to replace the current BOJ chief Masaaki Shirakawa, whose term will end in April.

The 10-year JGB yield 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, long-suffering "super-long" bonds such as the 30-year were pressured by concerns that bold BOJ steps could one day lead to inflation, undermining the real return of bonds.

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 match a record high of 101.5 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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