JGBs fall after sources say GPIF may invest more in stocks

Thu Aug 7, 2014 3:09am EDT

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* BOJ's asset purchase programme blunts JGB impact of reallocation

* Timing of GPIF reallocation is key to market impact - strategist

TOKYO Aug 7 (Reuters) - Japanese government bonds fell on Thursday after sources said the Government Pension Investment Fund (GPIF) plans to shift more of its portfolio from bonds to riskier assets such as equities.

The sources familiar with the fund's plans said the GPIF will likely lower its JGB weighting to around 40 percent from a current 60 percent target.

It will also allocate over 20 percent of its funds to domestic stocks compared with a current 12 percent target as it aims to generate higher returns for the country's ageing population.

The yield on the benchmark 10-year JGB was unchanged from the previous session before the GPIF news, after which it added 1 basis point to 0.525 percent.

The 30-year yield added 1.5 basis points to 1.695 percent, from 1.680 percent earlier in the session.

Ten-year lead September JGB futures dropped 0.08 point to 145.95, after finishing at midday up 0.06 point at 146.09.

"JGBs were responding to the Nikkei's rebound, which was boosted by the Reuters report on GPIF," said Naomi Muguruma, senior fixed-income strategist at Mitsubishi MUFJ Morgan Stanley Securities.

The Nikkei stock average ended up 0.5 percent, turning positive after it was earlier on track for a sixth straight losing session.

The yen weakened on the GPIF news, with the U.S. dollar adding about 0.3 percent to 102.36 yen, after rising as high as 102.46 yen, pulling away from a 1-1/2 week low near 101.76 yen set on Wednesday.

The GPIF's new allocations are largely in line with most expectations, Muguruma said, but timing will ultimately determine the extent of its effect on the JGB market.

"What JGB participants would like to know next is how long the GPIF will take before adjusting its portfolio to the new model portfolio, which is unclear at this moment," she said, adding that domestic investors were still buying JGBs on dips, limiting the market impact.

The Bank of Japan's massive asset-purchase programme also blunted the JGB market impact. The central bank began a two-day meeting on Thursday at which it is expected to maintain its policy framework, under which it has pledged to increase base money by 60-70 trillion yen per year through aggressive asset purchases.

The BOJ buys the equivalent of 70 percent of new JGB issuance every month, which has capped yields. The 10-year yield fell as low as 0.510 percent in early July, its lowest level since April last year.

After recent downbeat data, some BOJ policymakers might propose offering a bleaker view on exports and output than given in the July assessment.

(Reporting by Lisa Twaronite; Editing by Kim Coghill)

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