Long-dated JGBs slip ahead of 20-year debt sale on Thursday

Wed Apr 17, 2013 2:50am EDT

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* Five-year yield dips after Tuesday's smooth auction

* Ten-year JGB futures end flat

By Dominic Lau

TOKYO, April 17 (Reuters) - Long-dated Japanese government bond prices eased on Wednesday ahead of an auction of 1.2 trillion yen ($12.3 billion) worth of 20-year debt on the following day, with the 30-year yield hitting a nearly four-week high.

Primary dealers are cautious on the 20-year auction,after last week's disappointing 30-year debt sale.

"Dealers are probably hedging against the 20-year auction. That's why the curve steepens," a fixed-income fund manager at a Japanese asset management firm in Tokyo said.

"Someone is continuing to sell the 30-year sector," the fund manager said, adding that it was contributing to the underperformance of the 20-year paper.

The 30-year yield rose 4 basis points to 1.645 percent, rising for an eight straight session.

The 20-year yield added 3 basis points to 1.515 percent, matching a three-week high touched on Monday.

Last week, the Ministry of Finance's 30-year debt sale met gloomy expectations as many investors opted to sit out and evaluate supply conditions in the wake of the Bank of Japan's sweeping stimulus measures announced on April 4.

The sale drew bids of 3.64 times the amount offered, up from the previous sale's bid-to-cover ratio of 3.33 times. But the tail between the average and lowest accepted prices surged to 1.16 from 0.16 at last month's offering, indicating weaker demand.

Yields on benchmark 10-year bonds edged up 1.5 basis point to 0.605 percent, well off a record low of 0.315 percent reached a day after the BOJ's April 4 announcement.

Ten-year futures were unchanged at 144.09, with volume hitting a two-week low.

The central bank is to meet market participants later in the day after holding a similar meeting with them last week to discuss the impact of the policy changes on the JGB market.

Trading in JGB has turned volatile since the central bank unveiled its policy action.

In the last meeting, discussions were centred on the BOJ's easing plan under which it will double its bond purchases in the next two years.

Yuya Yamashita, rates strategist at JPMorgan in Tokyo, was tactically bearish on JGBs, but said the market started to stabilise earlier than he had expected.

"We saw yesterday's five-year auction. My bearishness has actually reduced," Yamashita said, adding that he would look for more evidence from Thursday's 20-year auction before he reviews his position.

The five-year yield slipped 1 basis points to 0.250 percent after a smooth sale of 2.7 trillion yen worth of similar maturities in the previous session.

"As BOJ buying in the one-to-five-year sector is arguably insufficient relative to issuance, it is difficult to say whether the auction trend for five-year or the two-year bonds will undergo a radical change," Barclays wrote in a note.

"However, it may become difficult to judge the strength of an auction through a simple comparison with past auctions. In our view, yesterday's auction is a case in point."

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