JGBs mostly up on BOJ expectations; superlong tenor slips

Fri Jan 25, 2013 2:15am EST

Related Topics

* 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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