September 28, 2012 / 7:46 AM / 5 years ago

Ten-year JGBs up on month-end buying, yield hits 7-week low

* Yields on benchmark 10-year JGB down 6.5 bps in July-Sept

* JGB 30-year yields up 1 bp in the quarter

By Dominic Lau

TOKYO, Sept 28 (Reuters) - Benchmark 10-year Japanese government bonds rose on Friday in month-ending bargain hunting, with the yield hitting a seven-week low, shrugging off debt negative news of Spain's new economic reform plans and a tough budget to cut spending.

The 10-year yield slipped 1.5 basis points to 0.765 percent, and lost 6.5 basis points in July-September after falling 15.5 basis points in the previous quarter, its best quarterly decline in two years.

For the year, the 10-year yield is down 21.5 basis points.

"Current (yield curve) steepening is because of dip-buying pressure among domestic investors, particularly toward the end of the quarter," said Maki Shimizu, senior strategist at Citigroup Global Markets Japan.

"We saw some good demand because of the large bond redemption this month."

But some market participants fear that if present low yields continue, the coupon for next Thursday's 10-year bond auction will be below the current 0.8 percent at which it was set for the past three sales.

"That sector is a little bit expensive, but it's probably going to stay expensive." said Neale Vincent, strategist at Nomura Securities.

Ten-year JGB futures rose 9 ticks to 144.19 and were up 50 ticks for the quarter.

Shimizu said the 10-year yield was likely to rise in the next quarter on concerns that if Liberal Democratic Party leader Shinzo Abe were to become the next prime minister, he would likely pressure the Bank of Japan to ease monetary policy further.

"More reflationary policies are likely to come in. If such policies are hammered out, we will likely see equities rallying which will be negative for the bond market," she said.

Citigroup recommended investors short 10-year JGBs with a short cover at 0.950 percent, as the bank is forecasting the benchmark yield to climb to that level by the end of December, an 18.5 basis points increase from current levels.

For the 20-year yield, Citigroup expects it to rise to 1.700 percent, she said, adding that Japanese government bonds would be supported by concerns over the euro zone sovereign debt crisis and a global economic slowdown.

On Thursday, Spain's announcement of a detailed reform framework and a strict budget was seen by many as an effort to bring itself in line with likely conditions for an international bailout, which would be a step toward implementing the European Central Bank's bond-buying programme.

Yields on 20-year bonds drifted 0.5 basis point higher on Friday to 1.645 percent, while those on 30-year debt also rose by the same margin, to 1.890 percent.

The longer-dated 30-year bond has underperformed this quarter, up 1 basis point versus a 2-basis point fall for 20-year debt.

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