CORRECTED-JGBs gain on BOJ rate cut hopes, 5-year yield hits record low

Thu Feb 7, 2013 10:55pm EST

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(Corrects 6th para to clarify the yield hit a fresh low, corrects 10-year yield and change in bullet points)

* Short-dated bonds up as market looks to post-Shirakawa BOJ policy

* Shirakawa's announcement of early departure fuels buying

* 5-year yield hits record low of 0.135 pct

* 10-year yield down 1.0 bp at 0.760 pct

By Hideyuki Sano

TOKYO, Feb 7 (Reuters) - Japanese government bond yields slid on Thursday, with the five-year yield hitting an all-time low, as investors bet the Bank of Japan will adopt a zero interest rate policy under a new governor.

The current BOJ governor Masaaki Shirakawa has long resisted cutting interest rates, saying pushing interbank lending rates to zero would effectively kill money markets because there would be no incentives for trading.

But Shirakawa's announcement on Tuesday that he will step down in March, three weeks before his term expires, triggered a wave of buying in short-term notes as investors look to a post-Shirakawa BOJ.

"A new governor, whoever that will be, is supposed to take a different approach to monetary policy, to do something the BOJ hasn't done yet," said Tadashi Matsukawa, head of fixed income investment at PineBridge Investments in Tokyo.

Japanese Prime Minister Shinzo Abe, who has pressured the BOJ to take drastic easing steps to achieve inflation of two percent, is seen naming a new governor and two deputies later this month, bringing people with dovish credentials

The five-year yield fell 1.0 basis point to 0.135 percent , an all-time low.

The two-year JGB yield fell 1.5 basis point to 0.030 percent , its lowest since September 2002. The two-year yield has dropped 6.5 basis points so far this year, outperforming longer maturities.

The price of three-month euroyen interest rate futures also rose to a 7 1/2-year high of 99.80.

Many market players expect the BOJ to scrap the 0.10 percent interest rate the central bank pays on banks' excess reserves.

That had -- until recently -- discouraged banks from buying any short-term instruments yielding less than that.

In addition, there are expectations that the BOJ will extend the duration of bonds it buys under its asset buying scheme to those with up to five years to maturity from up to three years now.

"Many players were trying to cover short positions desperately. But I feel like people are becoming stupefied a bit... No one is thinking about funding costs now," said a trader at a Japanese brokerage firm.

The overnight call rate, at which banks lend money to each other, was at around 0.08 percent on Thursday.

The strength of short-term notes filtered through to the longer end of the market.

The 10-year yield fell 1.0 basis point to 0.760 percent , extending its drop from a three-week high of 0.805 percent hit on Monday. The 10-year JGB futures price rose 0.14 point to 144.15.

The 30-year bond yield dipped 0.5 basis point to 1.995 percent, still comfortably sitting in its rough 1.95-2.00 percent range in the past month.

Longest maturities such as 30-year bonds have not benefited from BOJ easing expectations on worries a radical monetary easing could boost inflation in the long run.

Sharp gains in Japanese share prices in the past few months also made investors reluctant to buy long-dated bonds.

The Nikkei share average hit its highest level in more than four years on Wednesday before giving up some gains on Thursday, on hopes of aggressive monetary easing. (Reporting by Hideyuki Sano; Editing by Sanjeev Miglani)

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