November 19, 2012 / 7:00 AM / in 5 years

JGBs weaken slightly ahead of BOJ policy decision

4 Min Read

* 10-yr futures slip, moving away from Fridays' 9-year high

* 10-yr, 20-yr yield spread not far from widest in 9 years

* BOJ expected to hold monetary policy steady on Tuesday

By Lisa Twaronite

TOKYO, Nov 19 (Reuters) - Benchmark Japanese government bonds started the week with a slightly lower tone, pressured by a weaker yen that bolstered stocks but not moving much from recent ranges as the Bank of Japan began its regular policy meeting.

The BOJ is expected to hold policy steady at the conclusion of its two-day meeting on Tuesday. It could hold off on any further stimulus steps until early next year, as it considers the policies of Japan's next government.

Japanese Prime Minister Yoshihiko Noda dissolved parliament on Friday for an election on Dec. 16, at which his ruling party is expected to fare poorly. Main opposition party leader Shinzo Abe, likely Japan's next prime minister, has called for the country's central bank to adopt interest rates of zero or below zero, and has raised market expectations of more fiscal and monetary stimulus.

"It's the foreign investors who get excited about change in Japan," said Shogo Fujita, chief Japan bond strategist at Bank of America Merrill Lynch.

"The domestic market is very sceptical, and you can hardly blame them. The market is bifurcating, with foreign investors in one camp and domestic investors in the other camp," he said.

The yen dropped to its lowest level in nearly seven months on Monday, on expectations the next government will take more fiscal stimulus steps and also pressure the BOJ into easing further.

"The yen weakened today, so stocks strengthened, so JGBs weakened slightly, but mostly, the market is waiting for the BOJ meeting to be over, although nothing is expected," said a fixed-income fund manager at a Japanese trust bank.

"The superlong tenor had just been coming back a bit, when last week Abe's remarks sent the yield curve sharply steepening again, and there is a perception that this might be overdone," he added.

The 10-year JGB futures contract ended down 0.08 point at 144.62, moving away from a nine-year high of 144.73 hit on Friday but holding above support at the 5-day moving average, now at 144.58.

In cash trading, 10-year yields rose 1 basis point to 0.735 percent, moving away from support at July's nine-year low of 0.720 percent.

Yields on 20-year debt and on 30-year bonds were flat at 1.680 percent and 1.950 percent, respectively.

On Friday, the yield spread between the 10- and 20-year debt rose to its highest levels since 1999 according to Reuters data, at 0.950 percentage point on a last-traded basis. On Monday, the spread stood at 0.945 point.

"We expect flattening pressure on the JGB market after the election if - as we expect - it becomes evident that Mr. Abe's policies cannot be achieved and the forex market reaction settles down," strategists at RBS Securities wrote in a note to clients on Monday.

They cited an opportunity to establish long-term flattener positions over the 10-year zone, as the yield curves steepens in the short-term.

A weekly gauge of sentiment in the Japanese government bond market worsened as investors expected that a likely change of government will lead to more aggressive monetary and fiscal stimulus steps and a steeper yield curve.

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