Ten-year JGB yield at 2-month low, longer-maturities underperform

Wed Jul 24, 2013 2:31am EDT

Related Topics

* Ten-year futures up but volume lowest since Dec. 25

* Longer-maturities up 0.5 to 1.5 basis point

* Long-end of yield curve steepens further

By Dominic Lau

TOKYO, July 24 (Reuters) - Yields on benchmark 10-year Japanese government debt dipped on Wednesday, matching a two-month intraday low touched in the previous session after the Bank of Japan offered to buy more bonds as part of its stimulus drive to revive the economy.

Longer-maturities underperformed, ahead of the Ministry of Finance's auction of 1.2 trillion yen ($12 billion), 20-year bonds on Thursday, leading a steepening in the long-end of the yield curve.

The 10-year yield was down 0.5 basis point at 0.770 percent.

"We have the BOJ operations that have been more active than before," said Maki Shimizu, senior strategist at Citigroup in Tokyo. "When there is no major catalyst in the market, that's when the BOJ operations have become more notable."

The BOJ offered to buy 950 billion yen worth of JGBs with residual maturities from one to 10 years. The Japanese central bank stunned financial markets on April 4, promising to inject $1.4 trillion into the economy in less than two years.

The 10-year JGB futures added 0.09 point to 143.79, hovering near a two-month intraday high of 143.85 hit on Tuesday, with 11,860 contracts changing hands, the lowest since Dec. 25.

"In terms of the supply-demand cycle, the market should start to think about next week's 10-year auction fairly soon. With yields below 0.80 percent and no participation by the BOJ, whether there will be sufficient demand at the auction is a major concern," Barclays Securities wrote in a note.

"The period from the end of this week to the start of next week, when the market starts to more fully discount the 10-year auction, could mark one turning point for a reversal in 10-year yields," it added.

The spread between the 10- and 20-year yield rose to a four-month high of 95 basis points, while that between the benchmark bonds and the 30-year debt climbed to 108.5 basis points, also a four-month high.

The steepening curve suggests economic improvement pushing up longer-dated yields and the impact of the BOJ bond-buying capping yields on short- to medium-maturities.

"Although it is far too early to say whether Abenomics is working, we have reviewed developments across a broad range of indicators and found that they all appear to be heading in the right direction," Societe Generale wrote in a report.

"So for now, Abenomics appears to be succeeding; however, turning it from short-term boost to long-term success will require key structural reforms."

The 20-year yield added 0.5 basis point to 1.720 percent, while the 30-year yield was up 1.5 basis points at 1.855 percent.

The JGB market shrugged off further evidence of slowing growth in China after activity in the country's manufacturing sector slowed to an 11-month low in July as new orders faltered and the job market weakened.

Hurt by the slowdown in China, Japan's exports rose less than expected last month.

"If (China) goes into recession, that's another story. So far we don't see heightened risk for that," Shimizu said, adding that the market was more focused on next week's U.S. non-farm payrolls data, which could give further clarity on when the Federal Reserve is likely to scale back its $85 billion a month bond-buying programme.

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