JGBs slip ahead of 40-year auction

Mon Aug 19, 2013 2:35am EDT

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By Lisa Twaronite

TOKYO, Aug 19 (Reuters) - Japanese government bonds slipped on Monday as investors positioned for a 40-year sale in the following session, but moves were small with the U.S. Federal Reserve's next policy move yet unclear.

On Tuesday, the Ministry of Finance will hold a quarterly auction of 400 billion yen ($4.1 billion) of 40-year bonds, and will offer 20-year bonds on Aug. 27.

"There are some short positions that will be covered at the auction," said Tadashi Matsukawa, head of Japan fixed income at PineBridge Investments.

Sagging U.S. Treasuries also undermined sentiment towards fixed-income assets.

The yield on 10-year Treasury debt rose to a fresh two-year high at 2.871 percent in Asia, as investors positioned for the likelihood that the U.S. central bank will begin tapering it $85 billion-a-month in asset purchases as early as September.

"There is no clear direct impact on JGBs from the continuing selloff in Treasuries, but it does make it a little easier to sell debt," said a fixed-income fund manager at a Japanese asset management firm.

The yield on the benchmark 10-year JGB rose half a basis point to 0.765 percent, pulling away from a three-month low of 0.730 percent hit last week.

Ten-year JGB futures ended down 0.11 point at 143.73, just a tick about their session low. Just 12,190 contracts changed hands, the lowest volume in two weeks.

The yield on 20-year debt was flat at 1.685 percent and the 30-year yield was flat at 1.810 percent.

According to International Financing Review, a Thomson Reuters publication, several money managers at domestic commercial banks, life insurers and pension funds hope JGB yields will move to a bearish curve-steepening bias.

"Japan is still facing uncertainties, but we foresee an end to the recent trend of stock weakness and yen gains over the next 1-2 weeks and upside resistance in the JGB market," strategists at RBS Japan wrote in a note to clients on Monday.

They anticipate a return to flattening in the yield curve after the 40-year sale.

"We advise investors to wait until the midsummer strong-yen nightmare dissipates, similar to the heat wave," they added.

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