Ten-yr JGB yield steady ahead of U.S. jobs, superlongs underperform

Fri Jul 5, 2013 2:32am EDT

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TOKYO, July 5 (Reuters) - Superlong Japanese government bonds underperformed on Friday after their previous session's gain, while the 10-year yield was unchanged ahead of the U.S. jobs data that could provide clues on when the Federal Reserve will start rolling back its stimulus.

The 10-year yield was flat at 0.860 percent after earlier falling to 0.845 percent to extend Thursday's drop after a strong 30-year debt auction. It has remained boxed in a range of 0.80 to 0.90 percent over the past five weeks.

"There is a feeling that it would be dangerous to sell, ahead of events, but at the same time there is no special reason to aggressively buy," said a fixed-income fund manager at a Japanese trust bank in Tokyo.

"This means the current rangebound trade is likely to continue this month."

Economists in a Reuters survey forecast that 165,000 jobs were created in June compared with 175,000 jobs added in May, while the unemployment rate is seen at 7.5 percent, versus 7.6 percent the prior month.

Fed Chairman Ben Bernanke said last month that the U.S. central bank plans to scale back its $85 billion a month bond-buying programme later this year if the economy strengthens as it expected.

Volatility has eased in the JGBs recently after the market was jolted by the Bank of Japan's announcement of a massive bond-buying programme on April 4 to pull the world's third-largest economy out of deflation.

The 30-day JGB futures implied volatility fell to a two-month low of 3.82 on Thursday - the latest figure will be updated later in the day. It hit a two-year high of 6.1 on April 12.

The BOJ on Friday offered to buy 410 billion yen ($4.10 billion) of JGBs in two tranches with residual maturities of up to one year and more than 10 years, as part of its monetary easing steps.

Ten-year JGB futures added 0.07 point to 142.55, with volume hitting a two-month low of 18,443 contracts.

According to International Financing Review, a Thomson Reuters publication, several regional banks sold JGBs maturing in four to five years, while domestic real money accounts largely hugged the sidelines.

The 30-year yield was up 1 basis point at 1.855 percent after earlier falling to a one-week low of 1.835 percent, and the 20-year yield also added 1 basis point, to 1.735 percent.

On Thursday, the 30-year yield dropped 5 basis points after the 30-year auction, while the 20-year yield was down 3.5 basis points.

The tail between the average and lowest accepted prices for the 30-year bond sale came in at 0.01, shrinking sharply from 0.32 at last month's offering, underscoring robust demand for the bonds.

"The fact that tails have nevertheless shortened in recent auctions may suggest an increase in bids premised on an intention to sell to the BOJ over the relatively short term," Barclays Securities wrote in a note.

"But for this to work, there must be an outlook for stable profit with little risk of a large post-auction price drop. More specifically, volatility must be low."

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