JGBs slip but BOJ expectations likely to limit downside

Thu Feb 14, 2013 1:46am EST

Related Topics

* Ten-year JGB futures fall, end 6 days of gains

* Volume on 10-year futures hit 2-week high

* BOJ keeps policy steady, raises economic assessment

By Dominic Lau

TOKYO, Feb 14 (Reuters) - Yields on Japanese government bonds edged up on Thursday, tracking higher U.S. yields after a tepid debt sale in the United States, while the Bank of Japan left its monetary policy steady.

Downward pressure on JGB prices, however, was likely to be limited in the near-term as the BOJ was still expected to keep buying short-dated debt to support the economy, although the central bank stood pat on Thursday, analysts said.

"Pressure on prices for the JGB is relatively limited as most participants are convinced that further purchases by the BOJ should support the market," said Tomohisa Fujiki, interest rate strategist at BNP Paribas.

The 10-year JGB yield rose 3 basis points to 0.765 percent, off a three-week low touched on Wednesday, shrugging off data showing the Japanese economy contracted for the third straight quarter.

Ten-year futures fell 34 ticks to 144.04, breaking below their 14-day moving average of 144.14 and snapping their six-session winning run. Trading volume hit a two-week high, with 45,990 contracts changing hands.

The BOJ kept monetary policy steady and raised its assessment of the economy, as the yen's recent weakness and budding signs of recovery in global demand offer some relief to the export-reliant economy.

Thursday's BOJ meeting was the second last before Governor Masaaki Shirakawa steps down on March 19, which will allow Prime Minister Shinzo Abe to nominate a governor more amenable to his call for aggressive monetary expansion.

In the October-December period, Japan's gross domestic product fell 0.1 percent from the previous quarter, below a median forecast of 0.1 percent expansion by a Reuters poll.

BNP Paribas's Fujiki said there was risk that if the continuing rally in equities, spurred by the yen weakness, would eventually lead to investors shifting out of fixed income, dampening JGB prices.

Tokyo's Nikkei share average has rallied more than 30 percent since mid-November after Abe called for bolder policy action from the central bank in his election campaign. During that period, benchmark 10-year yields have risen only 1.5 basis points.

"We will remain bullish until March," said Maki Shimizu, senior strategist at Citigroup Global Markets Japan.

She said investors were likely to reinvest their redemption on JGBs as well as putting fund to work before the end of Japan's fiscal year on March 31.

Overnight, the U.S. Treasury sold $24 billion in 10-year notes at a high yield of 2.046 percent, above what the market had expected and sending the benchmark yield in the secondary market higher.

The 5-year JGB yield added 1 basis point to 0.145 percent on Thursday, retreating from its record low of 0.135 percent.

Yields on 30-year bonds eased 1 basis point to 1.950 percent, hitting a three-week low and extending the previous session's 1 basis point fall after a reasonably well bid 40-year JGB auction. The 20-year yield put on 0.5 basis point to 1.755 percent.

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