JGBs steady ahead of expected solid demand at 10-year sale

Mon Jul 1, 2013 10:45pm EDT

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TOKYO, July 2 (Reuters) - Benchmark Japanese government
bonds were steady on Tuesday as investors anticipated a smooth
sale of 10-year debt this session.     
    
    * The Ministry of Finance offered 2.4 trillion yen ($24.06
billion) of 10-year bonds with a 0.8 percent coupon, reopening
the current issue. The ministry said it would reopen current
issues for the July and August auctions unless their yields move
by 20 basis points or more. 
    
    * "The auction will likely go smoothly," said a fixed-income
fund manager at a European asset management firm in Tokyo.
    "The JGB market has calmed down in recent weeks, and
volatility has been coming down, so it's safer to take positions
now than it was before."
    
    * In addition, market participants said dealers were
expected to buy at the auction to cover positions after they
sold bonds in the 10-year tenor to the Bank of Japan in its
regular outright purchase operations under its massive monetary
stimulus scheme.
    
    * Japan's monetary base hit a record high in June, BOJ data
showed on Tuesday, rising to 173.1 trillion yen at the end of
last month from 159.2 trillion yen the previous month, as a
direct result of the central bank's asset buying. The average
monetary base balance rose 36.0 percent in June from a year
earlier to 163.5 trillion yen, also a record high.
 
    The central bank is buying a monthly amount equivalent to
about 70 percent of new issuance, in a bid to hit a two percent
inflation target in two years.
    
    * The 10-year yield was flat at 0.880
percent, after earlier rising as high as 0.890 percent as
investors made room in their portfolios to buy at the auction. 
    The benchmark yield has remained in a range of 0.80 to 0.90
percent for about a month.
        
    * "While the yield level looks attractive to purchase at the
auction if the 10-year JGB yield continues to move in a tight
range, we admit it is not easy to buy aggressively considering
the risk of further yield rises," strategists at RBS Securities
Japan wrote in a note to clients.
    They recommended taking a relative-value trade for holding
the 10-year JGB, noting the 10-year/20-year yield spread
steepened into June, but started flattening recently and created
more opportunity to take steepener positions.

    * Ten-year JGB futures ended morning trade up 0.02
point at their session high of 142.33, after earlier sagging to
142.15.
  
    * The superlong sector underperformed, with the 30-year zone
particularly weak ahead of a sale of that maturity later this
week. The finance ministry will offer 600 billion yen of 30-year
debt on Thursday.
    The 20-year yield rose 1.5 basis point to
1.750 percent and the 30-year yield added 2 basis
points to 1.890 percent.
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