March 2, 2012 / 7:23 AM / 5 years ago

JGBs slip as stocks gain after ECB liquidity boost

5 Min Read

* 10-yr futures end below 25-day moving average

* Volatile moves possible ahead of fiscal year-end- strategist

* Data reinforce expectations BOJ to keep easy stance

By Lisa Twaronite

TOKYO, March 2 (Reuters) - Japanese government bonds fell on Friday, as fading worries over the euro zone debt crisis and rising equities sapped the appeal of safe-haven assets.

Solid demand at Thursday's 10-year JGB auction underpinned market sentiment, with traders citing purchases by banks ahead of Japan's fiscal year-end this month. But the Nikkei share average continued to rise, bringing its gains to 1.3 percent for the week and drawing attention away from bonds.

"You just can't explain rates where they are now, given what equities are doing," said Shogo Fujita, chief Japan bond strategist at Bank of America Merrill Lynch.

"But there is still tremendous support from the banking sector. The people I talk to are bearish, but most expect rates to remain where they are through the end of the month," he added.

The European Central Bank's half a trillion euros in cheap, 3-year loans fueled investors' risk appetite and pushed down yields on the debt of highly-indebted euro zone countries, such as Italy, on Thursday.

Bond prices were also supported by the Bank of Japan's surprise easing last month, in which it said it would spend an extra 10 trillion yen on JGB purchases as part of its asset-buying programme in which it buys bonds with up to two years left to maturity.

Some strategists say that signs of improving credit conditions in Europe could continue to lessen the appeal of bonds, and even lead to more volatile moves ahead of the fiscal year-end.

"You cannot ignore positive signs in Europe. I'm not comfortable buying duration now, it's best to prepare for tail risk," said Le Ngoc Nhan, a JGB strategist at Morgan Stanley, referring to the chance of a sudden volatile move in yields.

The International Monetary Fund has asked Japanese financial institutions to estimate the losses they would incur on their JGB holdings if long-term interest rates were to rise to around 2.5 percent, business daily Nikkei reported on Friday.

The yield on the latest 10-year JGBs rose one and a half basis points to 0.990 percent, pulling away from a 14-month low of 0.935 percent hit last month.

Ten-year JGB futures fell 0.17 point to 142.54, closing below both their 10-day moving average at 142.60 and their 25-day moving average at 142.58.

Longer durations also dropped, with the yield on the 20-year note rising one and a half basis points to 1.755 percent , and the 30-year yield also rising one point to 1.940 percent.

Utility Issuance Could Detract from Jgbs

Also weighing on bond market sentiment, Tohoku Electric Power Co Inc on Friday launched 60 billion yen in bonds, the first bond issue by a Japanese electric power company with nuclear power plants since the Fukushima crisis nearly a year ago.

The power company issued 50 billion yen of five-year bonds and 10 billion yen of 10-year bonds, with both tranches offered at a yield of 0.55 percentage point above the benchmark JGB yield.

If other utilities follow suit, such issuance could draw some demand away 5- to 10-year JGBs, though that impact is likely to be relatively small given their issue volume will be tiny compared to JGBs, the market particpants have said.

Data released earlier on Friday had no market impact, but suggested that the BOJ will need to maintain its easy policy this year, to meet its aim of pulling the economy out of deflation.

Japan's core consumer prices fell year-on-year for a fourth consecutive month in January, household spending fell more than expected and the unemployment rate rose to 4.6 percent in January from a revised 4.5 percent in December and against economists' median forecast of 4.5 percent.

The BOJ set an inflation goal of 1 percent last month, when it surprised with the additional stimulus.

BOJ Governor Masaaki Shirakawa told a parliamentary committee on Friday that he expects consumer prices to gradually rise in the coming years as the economy recovers with support from a pickup in global demand.

"We will continue with monetary easing until consumer inflation of 1 percent is in sight," Shirakawa said.

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