JGBs mostly up on BOJ expectations; superlong tenor slips
* 10-, 20-yr yield spread widens to record 104.5 bp * 10-yr futures close up after touching 6-week intraday high By Lisa Twaronite TOKYO, Jan 25 (Reuters) - Japanese government bonds mostly firmed on Friday, while the superlong tenor sagged on growing expectations that the Bank of Japan will have to take further steps to beat deflation. The yield curve steepened, with the spread between the 10- and 20-year yields widening to a record high of 104.5 basis points. "The steeper curve is probably here to stay. It's more structural than that in the U.S., and that's the trade to be in, for the foreseeable future," said Shogo Fujita, chief Japanese bond strategist at Bank of America in Tokyo. "We're at the new norm, and we'll trade around here, give or take 10 basis points," he added, referring to the 10/20-year spread. The BOJ on Tuesday doubled its inflation target to 2 percent and made an open-ended commitment to buying assets from next year. Japan's core consumer prices fell 0.2 percent in December from a year earlier, data released on Friday showed, down for a second straight month, and a far cry from the central bank's new price goal. The benchmark 10-year JGB futures contract ended up 0.10 point at 144.55, after hitting an intraday high of 144.58, its highest level since Dec. 13. The 10-year JGB yield slipped half a basis point to 0.725 percent, after falling as low as 0.720 percent, its lowest since Dec. 14. "I think people expect more from the BOJ to meet its target, so they think it is very safe to buy JGBs through the middle of the curve," said a fixed-income fund manager at a European asset management firm in Tokyo. Underpinning sentiment toward shorter maturities, the minutes of the BOJ's December policy meeting released on Friday showed that board member Koji Ishida proposed scrapping the 0.1 percent interest the central bank pays to financial institutions' excess reserves parked with it. He also proposed cutting the interest rate for the bank's fixed-rate market operation and other loan schemes to 0.03 percent from 0.1 percent, The five-year yield fell half a basis point to 0.145 percent. It fell as low as 0.140 percent on Tuesday, its lowest recorded level since Japan started issuing 5-year notes in 2000. By contrast, the superlong zone underperformed amid concerns that aggressive reflationary policies will lead to inflation in the long run. The 20-year yield added 1.5 basis points to 1.770 percent, while the 30-year bond yield added 2 basis points to 1.995 percent. BOJ Governor Masaaki Shirakawa, whose term ends in April, reaffirmed the bank's commitment to maintain powerful monetary easing on Friday, but he warned of potential risks. "Long-term interest rates will spike and erode the effect of monetary easing ... if people perceive the BOJ as having shifted to a policy of recklessly buying government bonds, focusing narrow-mindedly on achieving 2 percent inflation," Shirakawa told a news conference. A weakening yen also weighed on the longer end. The dollar rose as high as 90.695 yen on the EBS trading platform in morning trade, its strongest level since June 2010.
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