JGB 10-yr yield hits 3-mth peak after weak auction
* Ten-year auction tail widest in nine months
* Investors fret over size of debt issuance this FY and next
* Worries about outlook for U.S. Treasuries also hurt JGBs
* Ten-year futures drop 0.36 pt, biggest fall in two months
TOKYO, Nov 5 (Reuters) - The 10-year Japanese government bond yield hit a three-month high on Thursday as investors shied away from newly-auctioned 10-year bonds due to worries about the size of debt issuance for the rest of the fiscal year and next year.
The Ministry of Finance's auction of 10-year JGBs produced a tail of 0.14, the widest since a 10-year auction in February. A wide tail shows there is less consensus about where bonds should be priced and is a sign of weak auction demand.
Worries about the possibility of further increases to JGB issuance later this fiscal year and the size of debt issuance next fiscal year, as well as concerns about the near-term outlook for U.S. Treasuries likely led to the weak auction result, analysts said.
"In the United States, there are going to be some pretty frequent bond auctions next week. If overseas bond markets were to fall on worries about over-supply, you may see similar moves here," said Mari Iwashita, market economist at Nikko Cordial Securities. Rather than just focusing on how large JGB issuance may be in the next fiscal year, market players now seem to be finding additional reasons to be bearish on JGBs, she said.
The 304th 10-year JGB yield rose 4 basis points to 1.440 percent JP10YTN=JBTC, the highest yield for a benchmark 10-year JGB since August.
Lead 10-year JGB futures fell 0.36 point to 137.60 2JGBv1 for their biggest one-day decline in two months, and dropped to as low as 137.54, the lowest for a lead futures contract in about three months.
ISSUANCE WORRIES
The JGB yield curve has steepened this year, with longer term bonds falling as the economy recovered from troughs hit during the global financial crisis and on concerns about rising debt issuance.
By contrast, short-term bonds have been supported by market expectations for the Bank of Japan to keep interest rates close to zero in the foreseeable future as deflation persists, with some analysts saying the BOJ might not raise interest rates until sometime in 2011.
The MOF said last week that it would increase its issuance of JGBs to the market through regular auctions by 2.1 trillion yen ($23.18 billion) to 132.3 trillion yen for this fiscal year, to offset weak demand for JGBs among retail investors. [ID:nT78079]
Investors are bracing for the possibility of further increases in debt issuance this fiscal year to offset an expected tax revenue shortfall.
There are also worries about the size of JGB issuance in the next fiscal year. Some analysts estimate that debt issuance to the market through regular auctions may rise to roughly 142 trillion yen to 144 trillion yen in the fiscal year starting next April.
The impact on the yield curve will hinge on how such issuance is allocated among maturities, said Akitsugu Bandou, senior economist for Okasan Securities.
If issuance is concentrated in the shorter end of the yield curve, that could cause shorter-bond yields to rise and gradually push up the entire yield curve, Bandou said.
But if issuance is spread out among maturities, longer term bonds may feel the brunt of the impact and the yield curve could steepen, he said.
"I think it will be one or the other," Bandou said, adding that the 10-year JGB yield may rise to around 1.6 percent by the end of March. (Editing by Joseph Radford)
