* Yield curve steepens as superlong tenor lags
* 10-yr futures erase losses as stocks rally, touch 9-yr
* 20-yr sale meets solid demand, with bid-to-cover of 3.67
By Lisa Twaronite
TOKYO, Nov 15 Benchmark Japanese government bond
prices erased losses and longer maturities skidded on Thursday
after Shinzo Abe, touted as Japan's next leader, called for the
country's central bank to adopt interest rates of zero or below
Cash JGBs were already paring their morning losses after a
20-year sale attracted solid demand, when Abe told reporters he
wanted to see further aggressive easing to enhance lending.
His remarks sent stocks up and the yen down, and helped push
JGB futures to a 9-year high. The JGB yield curve steepened as
5- and 10-year notes rose while the superlong sector sold off.
"Abe said he wanted zero or minus interest rates. That
triggered a big rally in the stock market, and also a weaker
yen, and the short- to mid-range of the JGB market is very
strong. So everyone is happy right now -- except for those who
bought the 20-year paper today," said Tadashi Matsukawa, head of
Japan fixed income at Pinebridge Investments in Tokyo.
"If you lower interest rates to zero, you get a steep yield
curve, so this could probably continue."
Japanese Prime Minister Yoshihiko Noda is set to dissolve
parliament's lower house on Friday for a snap election on Dec.
16, in which his party is likely to fare poorly.
Abe, leader of the main opposition Liberal Democratic Party,
is likely to take the helm and bring more expansive fiscal
policies while increasing pressure on the Bank of Japan for more
The BOJ is set to hold steady at a policy meeting next
week. It might also defy market expectations of action next
month and hold off on any further monetary stimulus until early
next year to size up the policies of a new government, sources
The 10-year JGB futures contract closed up 0.12
point at 144.59 after rising as high as 144.66 after Abe spoke.
Futures ended morning trade down 0.12 point at 144.35. Volume
was an active 50,507 contracts, its heaviest since Oct. 18 and
nearly four times Thursday's volume of 13,581 contracts.
In cash trading, 10-year yields slipped half
a basis point to 0.730 percent, within 1 basis point of a
nine-year low of 7.20 percent hit in July. Earlier, 10-year
yields climbed as far as 0.760 percent, their highest in a week.
The yields on 30-year bonds, the most
sensitive to political concerns, added 3 basis points to 1.935
percent, while yields on 20-year debt gained 2.5
basis points to 1.680 percent.
The spread between 10-year and 30-year yields rose to 1.205
percentage points, its widest since March 2008.
Abe's comments completely overtook any impact from a strong
20-year auction. The Ministry of Finance offered 1.2 trillion
yen of 20-year notes, reopening the number 140 issue for the
second time with a coupon of 1.7 percent.
The sale's lowest accepted price was 100.25, and it drew
robust bids of 3.67 times the amount offered, only slightly down
from the previous sale's bid-to-cover ratio of 3.81. The tail
widened slightly to 0.03 from 0.01 at the last sale.
"The results came out better than expected, but still,
concerns remain for the superlong tenor, and dissolution
obviously puts steepening pressure on the curve," said Maki
Shimizu, senior strategist at Citigroup Global Markets Japan.
"If rates were lowered, meaning if the paid interest on
excess reserves was lowered, then that will definitely support
not just medium-term but the long-term sector, so that would
make the curve keep steepening," she said.