October 23, 2012 / 7:56 AM / 5 years ago

JGBs fall, 30-year yield hits 6-mth high on Japan fiscal worry

4 Min Read

* Superlongs underperform, with 30-yr yield up 3 bps

* Spread between 10- and 20-yr bonds widens to 11-month high

By Dominic Lau and Lisa Twaronite

TOKYO, Oct 23 (Reuters) - Japanese government bonds slipped on Tuesday, with the 30-year yield hitting a six-month high on concerns over Japan's fiscal situation, though shorter-dated notes were supported by growing expectations of new easing steps by the Bank of Japan.

The Ministry of Finance said it would hold a meeting with JGB primary dealers on Friday to discuss contingency plans in case there was a delay in the passage of a deficit-financing bond bill.

"I suppose those fiscal concerns and the newly added factor -- the progress of yen depreciation -- have actually led to the underperformance of the superlong sectors," said Maki Shimizu, senior strategist at Citigroup Global Markets Japan.

The heightened expectations for further BOJ easing weighed on the yen, which skidded to a three-month low of 80.02 yen against the dollar and a five-month low against the euro.

A weaker yen is seen as key to help boost Japan's export-reliant economy, and if the economy were to improve, fixed-income assets such as JGBs especially those longer-dated bonds would lose their appeal.

Yields on 30-year debt gained 3 basis points to 1.955 percent, their highest level since April 6, while those on 20-year bonds added 2.5 basis points to 1.700 percent.

The benchmark 10-year JGB yield added 0.5 basis point to 0.780 percent after rising as high as 0.790 percent, approaching last week's peak of 0.795 percent, its highest since late September.

But the 5-year yield was unchanged at 0.20 percent, supported by mounting BOJ expectations.

The BOJ is leaning towards easing monetary policy again at its Oct. 30 meeting, according to sources familiar with its thinking, policymakers are discussing additional steps that could be taken together with a further increase in its asset-buying programme.

The most likely option is a further 10 trillion yen ($126 billion) increase, mostly in the form of government bond buying. But it might also include a small increase in purchases of exchange-traded funds (ETF) and real estate investment trusts (REIT), the sources said.

Sources have also said the central bank will likely cut its long-term economic and price forecasts at next week's meeting.

The 10-year JGB futures contract eased 4 ticks to 143.98 after hitting a session low of 143.80. Support was seen at last week's low of 143.79, which was its lowest since Sept. 21.

The spread between the 10- and 20-year bonds widened to 91.5 basis points, its highest level in 11 months.

But Yuya Yamashita, rates strategist at JPMorgan, said it was partly skewed by demand from domestic banks in the 10-year sectors or below. Their purchases fluctuated greatly from one month to the next, as it was difficult to time when to bet on the spread to tighten in a flattening trade, he said.

"City banks' buying tends to be volatile, fluctuating from positive to negative," Yamashita said.

"It really depends on city banks' activities," he added.

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