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JGBs rise on BOJ hopes, Cyprus concerns; 10-yr yield hits near-decade low
March 22, 2013 / 6:41 AM / 5 years ago

JGBs rise on BOJ hopes, Cyprus concerns; 10-yr yield hits near-decade low

* BOJ chief vows to use all means available to achieve price target

* Ten-year futures vault to record high for 2nd straight day

* Superlongs outperform, with 30-year yield down 6 bps

By Dominic Lau

TOKYO, March 22 (Reuters) - Yields on benchmark 10-year Japanese government bonds slipped to a near-decade low for a second day in a row on Friday after the new Bank of Japan chief reinforced expectations that the central bank would buy longer-term assets to combat deflation.

Concerns over Cyprus also helped push JGB yields lower as investors looked to less risky assets such as government bonds.

The European Union gave the island’s government until Monday to raise the billions of euros it needs to secure an international bailout or face a collapse of its financial system.

Haruhiko Kuroda said in his inaugural press briefing that the BOJ is ready to use all means available, including buying longer-term assets, to achieve its 2 percent inflation target.

His comments supported market expectations that the central bank will expand stimulus at its next policy meeting on April 3 and 4.

“Kuroda’s comment has probably a larger impact on the JGB yield curve,” said Naomi Muguruma, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities.

“Market participants have more or less expected that the BOJ will purchase at the long-end of the curve. At this stage it’s hard to pinpoint how long the BOJ will extend its duration or how fast they will purchase the long-end of the curve.”

The 10-year yield dipped 1 basis point to 0.565 percent, its lowest level since June 2003, and was down 5.5 basis points this week.

Ten-year JGB futures ended 16 ticks higher at 145.73 after touching a record high of 145.75. Trading volume was light, with 18,903 contracts changing hands, down from Thursday’s 24,821 and last week’s daily average of 26,475.

Muguruma said there was a possibility of the 10-year yield testing 0.50 percent in the run-up to the BOJ policy meeting, adding that investors were likely to sell the “fact” if the central bank’s decision fell within market expectations.

“Investors will lock in profits in the beginning of the fiscal year. We will probably see some knee-jerk rise in JGB yields. But as long as the BOJ keeps its aggressive easing, the extent of the yield rebound will be limited,” she said.

Fixed-income strategists and analysts polled by Reuters expected the 10-year JGB yield would reach 0.750 percent by the end of June and 0.960 percent in the next 12 months.

The 10-year yield has fallen 23 basis points so far this year, largely driven by expectations the BOJ would step up its policy action to pull the world’s third-largest economy out of deflation.

SUPERLONGS OUTPERFORM

Superlong sectors outperformed, leading a flattening in the yield curve. The 20-year yield eased 3 basis points to 1.490 percent, not far from a near 10-year trough of 1.450 percent reached on March 5.

The 30-year yield fell 6 basis points to 1.620 percent, touching a 2-1/2-year low. It has fallen 35.5 basis points this year.

Societe Generale said investors should hold a 10-/20-year flattener, essentially betting on the spread between the two maturities narrowing, until the BOJ meeting in early April.

It proposed a target of 80 basis points with a stop at 110 basis points. The spread between 10- and 20-year JGBs stood at 92.5 basis points, a two-week low.

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