JGBs soar on expectation a Kuroda-led BOJ would ease aggressively

Mon Feb 25, 2013 1:53am EST

Related Topics

* 5-yr yield at record low after reports Kuroda to head BOJ

* 10-yr yield drops to lowest since mid-Dec

* Rinban bond purchases could be increased

* 10-yr futures touch highest in more than two months

TOKYO, Feb 25 (Reuters) - Japan government bonds rose on Monday, with the benchmark yield dropping to its lowest in nearly 11 weeks and the five-year yield plumbing a fresh record nadir after sources said monetary easing advocate Haruhiko Kuroda will be tapped as central bank chief.

Kuroda, president of the Asian Development Bank, has long criticised the Bank of Japan as too slow in expanding stimulus, so he would be expected to push more radical efforts to achieve its 2 percent inflation target set in January.

These measures could include increasing the central bank's bond-buying "rinban" operation, through which it buys 21.6 trillion yen ($231.7 billion) worth of JGBs per year. Rinban is separate from the BOJ's asset-purchase programme, under which it only buys bonds with up to three years left to maturity.

"The market reacted with a bull-flattening bias early in the morning session. It seems the market has started to price in more for an increase in the rinban operations," said Tomohisa Fujiki, interest rate strategist for BNP Paribas in Tokyo.

The prospect for more aggressive purchasing of longer-term bonds helps explains why gains were not confined to the short- and mid-term sectors of the yield curve, he said

In addition to the Kuroda developments, Japanese academic Kikuo Iwata, an advocate of unorthodox monetary easing steps to beat deflation, said he had been sounded out by Prime Minister Shinzo Abe for the post of deputy BOJ governor and would accept if nominated.

"Mr. Iwata is more for buying longer bonds, so let's see," Fujiki said.

The yield on 10-year bonds shed 2.5 basis points to 0.700 percent, its lowest since Dec. 12.

Ten-year JGB futures ended up 0.17 point at 144.67, after rising as high as 144.74, their highest since Dec. 11.

RECORD-LOW TERRITORY

The five-year yield dropped 1 basis point to 0.120 percent, the lowest recorded since Japan started issuing 5-year bonds in 2000. That tenor pushed into record-low territory last month, on expectations the BOJ will eventually increase the time left to maturity of JGBs bought in its asset purchase programme.

"If such an expectation gets priced into the market, it will probably start putting downward pressure on yields in the 5- to 10-year sector," Tomohiro Miyasaka, an analyst at Credit Suisse in Tokyo, said in a note to clients on Monday.

Meanwhile, he said expects loose supply-demand conditions for 20-year JGBs, because of their low absolute yield levels, so he recommends a 7-year/20-year steepener to benefit from this steepening of the JGB yield curve.

The 20-year yield slipped 1 basis point to 1.710 percent after dropping to 1.705 percent earlier, its lowest since Dec. 21.

The 30-year yield fell 1.5 basis points to 1.900 percent after dropping as low as 1.890 percent.

A weekly gauge of sentiment in the Japanese government bond market turned positive for the first time in eight weeks, bolstered by expectations of more BOJ easing, the latest Thomson Reuters poll showed on Monday.

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