Superlong JGBs skid after tepid demand at 20-year auction

Thu Jan 24, 2013 2:12am EST

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* 10-year futures turn positive on dip-buying after sale
    * BOJ's commitment to easy policy bolsters 5-year zone

    By Lisa Twaronite
    TOKYO, Jan 24 (Reuters) - Japanese government bonds skidded
on the long end on Thursday after a lacklustre auction of
20-year bonds, but 10-year futures turned higher on dip-buying
after the sale.
    The Ministry of Finance offered 1.2 trillion yen of 20-year
bonds, reopening the number 141 issue with a 1.7 percent coupon,
matching that of the past four sales. 
    The bonds sold at a lowest price of 99.05, far short of
market expectations of 90.25.
    The sale drew bids of 3.05 times the amount offered, down
from the previous sale's bid-to-cover ratio of 3.11 and below
the one-year average of 3.30. The tail between the average and
lowest accepted prices widened to 0.20 from 0.19 last month.
    Many market participants had expected a smooth sale because
20-year bonds had recently become cheap on the curve,
particularly against 10-year bonds. 
    However, others feared that 20-year debt looked expensive
compared with swaps, due to the yen's correction from a 2-1/2
year high of 90.25 yen against the dollar on Monday.    
    "Some were expecting a good one, but we didn't see decent
bids at the auction because people were probably waiting for the
dip, just to pick up the bottom," said Maki Shimizu, senior
strategist at Citigroup Global Markets Japan.
    "Once it sold off, futures got stronger, and the short end
of the curve is also supporting futures to some extent," she
said. "That means that people still want to buy, meaning they're
not bearish."
    The benchmark 10-year JGB futures contract ended up
0.08 point at 144.45, six ticks below its intraday day high and
moving back toward a nearly six-week high of 144.57 hit on
Tuesday. Futures fell as low as 144.25.
     The 20-year yield added 2.5 points to 1.755
percent, while the 30-year bond yield added 2
basis points to 1.975 percent.   
  
   
    Bonds were underpinned by data on Thursday showing Japan
logged a record annual trade deficit in 2012 as exports
continued to slide in December. 
    The Bank of Japan's commitment to easy policy also continued
to lend support to JGBs. On Tuesday, the BOJ doubled its
inflation target to 2 percent, and announced it will make
open-ended asset purchases beginning in 2014 and will expand the
central bank's balance sheet by a relatively modest 10 trillion
yen ($114 billion). 
    While the timing and the amount disappointed investors who
hoped for more immediate, substantial purchases, market
participants said the central bank's commitment to fight
deflation underpinned bonds and raised expectations that more
easing steps lie ahead.    
    "Expectations that easy policy will continue have been
lifting short- and medium-term bonds," said a fixed-income fund
manager at a Japanese asset management firm in Tokyo.
    The five-year yield slipped half a basis point
to 0.155, moving close to its low of 0.140 percent hit on
Tuesday in the wake of the BOJ's decision. That was the lowest
recorded since Japan started issuing 5-year bonds in 2000.  
    The 10-year JGB yield was flat at 0.730
percent.
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