Japan 10-, 20-yr govt bond yields hit near-decade low on stimulus hopes

Thu Mar 28, 2013 2:44am EDT

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By Dominic Lau

TOKYO, March 28 (Reuters) - Yields on benchmark 10-year Japanese government bonds plumbed a near-decade low for a sixth day in a row on Thursday, driven by market conviction that the central bank will deliver a bold monetary stimulus at its meeting next week.

The 10-year yield dipped 0.5 basis point to 0.510 percent, its lowest level since June 2003, when it slumped to a record trough of 0.430 percent on the back of the Bank of Japan's quantitative easing measures.

It has fallen 28.5 basis points so far this quarter, on track for its biggest three-month fall in nearly three years.

But Maki Shimizu, senior strategist at Citigroup in Tokyo, recommended investors close their long positions on the 10-year sector ahead of an auction of 2.4 trillion yen ($25.4 billion) of similar maturities on Tuesday and the BOJ policy meeting on April 3 and 4.

"We just closed our 10-year long strategy. Many people among domestic investors are probably thinking about closing their long positions now, ahead of the BOJ meeting," she said.

"We are wary of the factors that could support higher yield from next week onwards. We chose not to wait until the BOJ meeting."

Ten-year JGB futures marked a new record high of 145.98, before ending the day down 0.02 point at 145.86. Trading volume was the lowest this year, with 16,970 contracts changing hands.

Shimizu said investors were also likely to take profit near the start of the financial year in Japan, which begins on April 1.

"The question is when that will happen ... whether they will wait until the BOJ meeting. If that becomes the majority view (waiting until the BOJ meeting) into next week, then the 10-year yield can renew this 0.430 (percent) record low," she said. "The view is still spilt."

Citigroup expected the 10-year yield to trade in a range of 0.60 to 0.80 percent in the next three months.

The 20-year yield fell 3 basis points to 1.405 percent for the day. It tugged its lowest level since July 2003 at 1.400 percent earlier in the afternoon session.

The 30-year yield eased 2 basis points to 1.560 percent, just a touch above its near-decade low of 1.545 percent hit on Tuesday.

The yield on the long-dated tenor has eased 41.5 basis points since the start of January, heading for its biggest quarterly fall since April-June 2010.

"Yields have already dropped to levels that do not offer further upside," Royal Bank of Scotland wrote in a note. "We think it will be a real challenge to sustain current 10-year-plus JGB yield levels."

"While shorting is not a good choice at this point because the possibility of buying at 1 trillion yen per month (by the BOJ) cannot be ruled out, we advise straddle buying rather than outright long positions."

The two-year yield was unchanged at 0.035 percent for the day after an auction of 2.9 trillion yen worth of similar maturities attracted decent demand. It rose as much as 1.5 basis points to 0.050 percent ahead of the bond sale.

The 0.10-percent coupon bonds were sold with a bid-to-cover ratio of 5.48, up from 5.14 in the previous auction.

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