* Expectations of month-end pension funds buying support
* Market cautious of testing resistance ahead of auction
* Yield curve seen steepening further on BOJ speculation
* Two-year bond yield falls below 0.10 pct at auction
By Hideyuki Sano
TOKYO, Nov 27 Japanese government bond prices
were mostly little changed on Tuesday, supported by hopes of
month-end buying from pension funds but lacked fresh impetus to
extend their rally beyond a key resistance level.
Longer maturities such as 20- and 30-year bonds remained
fragile, still smarting from concerns that main opposition party
leader Shinzo Abe, seen as a front-runner to become prime
minister after an election next month, will push for radical
"I think there's a growing consensus that steepening will
continue. At least, it's hard to expect a flattening," said a
trader at a Japanese brokerage.
The benchmark 10-year cash JGB yield was flat at 0.730
percent, unable to test the nine-year low of
0.720 percent hit in July.
Although expectations of month-end buying by pension funds
supported the market, traders were unwilling to test the 0.720
percent level, partly on caution ahead of the 10-year bond
auction next Tuesday.
In when-issued trade, the new 10-year bonds to be offered
next month traded at an yield of 0.755 percent on Tuesday.
Many traders were wary of bidding for the new issue below
the yield of 0.750 percent, which would likely prompt the
Ministry of Finance to lower the coupon rate to 0.7 percent from
0.8 percent in the past six issues.
The 10-year JGB futures prices ticked up 0.02 point to
144.62, but trading volume was nearly 30 percent below
the average so far this year.
The 30-year bond yield was unchanged at 1.935 percent
while the 20-year bond yield also was flat at
1.6700 percent, both erasing yield falls in early
The spread between 10- and 20-year yields stood at 94.0
basis points, still near a 13-year high of 95.0 basis points hit
last week on so-called "Abe trade": bets on radical easing by
the Bank of Japan.
The superlong maturities were vulnerable as radical monetary
easing might lift inflation, which would undermine bonds' return
in real, or price-adjusted terms.
Abe has called for setting inflation target of two percent
as well as cutting interest rates to zero or even to sub-zero
On the other hand, many investors feel comfortable buying
short-term bonds as further monetary easing is likely to include
more buying of short-term bonds.
In the Finance Ministry's auction of two-year bonds, the new
bonds maturing in December 2014 were sold at an average yield of
0.096 percent, the lowest level since July.
The strong auction results suggested some market players are
starting to price in the chance the Bank of Japan might accept
Abe's idea and scrap the 0.10 percent floor on short-term
interest rates the central bank has kept in the current easing
cycle that started in 2008.
Still, with Japan's election on Dec. 16 still a few weeks
away, the market may soon shift its focus back to global issues
especially the U.S. fiscal cliff, market players also said.
"I think the 'Abe trade' has run its course for now.
Globally bonds will likely be in a holding pattern for the time
being, given that U.S. policy makers haven't set schedule for
their next talk on fiscal cliff," said Tohru Yamamoto, chief
bond strategist at Daiwa Securities.
The market hardly reacted after Greece's international
lenders clinched an agreement on reducing the country's debt, as
many investors had been expecting policymakers to eventually
agree on a deal to avoid Athens defaulting on its payments.