JGBs gain on BOJ hopes, Cyprus woes; 10-year yield at near-decade low

Thu Mar 21, 2013 10:24pm EDT

Related Topics

* BOJ chief vows to use all means available to achieve price target

* Ten-year futures vault to record high for 2nd straight day

By Dominic Lau

TOKYO, March 22 (Reuters) - Yields on benchmark 10-year Japanese government bonds slipped to a near-decade low for a second day in a row on Friday after new Bank of Japan chief reinforced expectations the central bank would buy longer-term assets to combat deflation.

Concerns over Cyprus after the European Union gave the island till Monday to raise the billions of euros it needs to secure an international bailout or face a collapse of its financial system also helped push JGB yields lower.

Haruhiko Kuroda said in his inaugural press briefing that the BOJ is ready to use all means available, including buying longer-term assets, to achieve its 2 percent inflation target.

His comments supported market expectations that the central bank will expand stimulus at its next scheduled policy-setting meeting on April 3 and 4.

"Kuroda's comment at his inaugural press conference has probably a larger impact on the JGB yield curve," said Naomi Muguruma, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities.

"Market participants have more or less expected that the BOJ will purchase long-end of the curve. At this stage it's hard to pin point how long the BOJ will extend its duration or how fast they will purchase the long-end of the curve."

The 10-year yield dipped 1 basis point to 0.565 percent, its lowest level since June 2003, and is down 5.5 basis points this week.

Ten-year JGB futures ended the morning session 12 ticks higher at 145.69 after touching a record high of 145.73.

Muguruma said there was a possibility of the 10-year yield testing 0.50 percent in the run-up to the BOJ policy meeting, adding that investors were likely to sell the "fact" if the central bank's decision fell within market expectations.

"Investors will lock in profits in the beginning of the fiscal year. We will probably see some knee-jerk driven rise in JGB yields. But as long as the BOJ keeps its aggressive easing, the extent of the yield rebound will be limited," she said.

The 20-year yield eased 2.5 basis points to 1.495 percent, not far from a near 10-year low of 1.450 percent reached on March 5. The 30-year yield fell 4 basis points to 1.640 percent.

Societe Generale said investors should hold 10-/20-year flattener, essentially betting on the spread between the two maturities narrowing, until the BOJ meeting in early April.

It proposed a target of 80 basis points with a stop at 110 basis points. The spread between 10- and 20-year JGBs stood at 93 basis points.

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