* 40-year bond auction draws tepid demand
* Bid-to-cover lowest since Aug 2011
* Investors anxious BOJ is tolerating higher yields
* 10-year yield could peak around 1 pct - strategist
By Hideyuki Sano
TOKYO, May 21 Japanese government bond prices
sagged on Tuesday after an auction of 40-year bonds drew tepid
demand as investors grew suspicious that the Bank of Japan is
tolerating a rise in bond yields as it tries to boost inflation.
The 30-year bond yield hit a fresh three-month high while
the 10-year yield edged near a one-year peak hit last week as
market players gird themselves for the outcome of the BOJ's
two-day policy meeting which ends on Wednesday.
"There was an opinion that the recent rise in yields should
attract investors but the auction result showed that wasn't
simply the case," said Akito Fukunaga, chief rates strategist at
The auction of 400 billion yen ($3.9 billion) of 40-year
JGBs, the longest maturity currently on offer, produced a high
yield of 1.955 percent, a bit above market expectations. Bids
were just 2.64 times the offer, the lowest since August 2011.
The yield on the current 10-year cash bonds rose 3.0 basis
points to 0.875 percent, not far from a one-year
high of 0.920 percent last Wednesday.
The 30-year bond yield rose 2.5 basis points to 1.845
percent, climbing as high as 1.865 percent at one
stage, its highest level since late February.
JGBs have been trapped in its worst bear market since 2008
after aggressive stimulus the BOJ started in April unsettled
investor confidence that inflation would be kept low.
As of Monday this week, the Nomura Bond index, a
widely used bond index, fell 2.9 percent since April 4 -- when
the BOJ unveiled an unprecedented plan to almost double its
balance sheet in two years -- the biggest fall since March-June
Although the BOJ has boosted bond purchases to achieve this,
that impact was dwarfed by a surge in stocks and fall in the
yen, which prompted some investors to shift funds out of bonds.
BOJ Governor Haruhiko Kuroda did little to soothe bond
investors on Monday, when he said it was natural for long-term
bond yields to rise as inflation expectations pick up.
Many market players expect Kuroda to repeat a similar
message on Wednesday, when he concludes a two-day policy
meeting, which could push yields further.
Fukunaga at RBS said the 10-year yield could hit 1.0
"If the 10-year yield hits one percent, though, my guess is
share prices will be negatively affected. Bank shares and Reits
(real estate investment trusts) already seem to have high
correlation with bond prices. So I suspect the yield will peak
around that level," he said.
In addition to the BOJ, some market players are wary U.S.
bond yields could jump if Federal Reserve Chairman Ben Bernanke
signals he is ready to taper the Fed's bond buying at his
congressional testimony on Wednesday.
In the futures market, the 10-year JGB futures price fell
0.23 point to 141.89.