* Report LDP likely to win outright majority spurs BOJ
* 30-year JGB auction draws strong demand, triggering
cascade of buying
* Yields seen staying under pressure for now
By Hideyuki Sano
TOKYO, Dec 6 Japanese government bonds gained on
Thursday, with 10-year futures at a record high after media
reports showed the main opposition party was likely to win a
solid majority in the upcoming election, reinforcing
expectations of bolder monetary easing.
The market got another boost after an auction of 30-year
JGBs drew strong demand, helping the longest maturities to
outperform sharply after weeks of underperformance on concerns
aggressive money printing could lead to future inflation.
"Some people are saying that after futures broke record
highs, the sky is the limit," said a trader at a Japanese
Ten-year JGB futures rose 0.23 point in price to 145.22
, their largest gain in 2-1/2 months. The contract hit
an intraday record high of 145.24.
Trade volume was heavy, with 64,642 contracts changing
hands, the second largest this year and more than double the
average daily turnover of around 26,800.
The rally was sparked initially by Japanese media polls
showing that the conservative Liberal Democratic Party was
likely to sweep to victory in the Dec. 16 election. The LDP's
leader Shinzo Abe has made bolder easing by the Bank of Japan a
pillar of his platform.
The news helped to push the five-year yield below its key
resistance at 0.165 percent to 0.155 percent, a
level not seen since June 2003, when it hit a record low of
0.145 percent amid the country's banking crisis.
Investors think any future easing is likely to involve
further expansion of the BOJ's asset purchase programme, which
it conducts on top of its 1.8-trillion-yen-a-month bond buying
With the central bank already committed to buying more than
one trillion yen of bonds with up to three years to maturity
every month in that programme, traders think the BOJ may include
longer bonds if it expands the asset purchase scheme.
"There's a perception that the BOJ will have to extend the
target of its asset purchase programme to five years, aside from
whether it will do that this month or not," said a portfolio
manager at a major Japanese bank.
Many market players have also expected the BOJ to take
easing steps in its next policy meeting on Dec. 19-20.
SURGE IN LONGEST MATURITIES
The auction of 700 billion yen ($8.5 billion) 30-year JGBs
drew strong bids, triggering another avalanche of buying and
unwinding of steepening trades that became popular in recent
week based on expectations of more BOJ easing.
The 30-year JGB yield dropped 6.0 basis points to a
two-month low of 1.885 percent, its biggest daily
fall since March 2011.
The spread between 10- and 30-year yields dropped to 119.5
basis points, slipping from 125.5 points set earlier in the
week, which was its highest level since early 2008.
"The auction results were surprisingly strong...I suppose
they were attractive to some investors as the spread was so
wide," said Chotaro Morita, chief fixed income strategist at
"Where the market is going from here obviously depends on
the BOJ's policy but at least yields are likely to fall for the
time being," he added.
The 10-year JGB yield fell 2.5 basis points to 0.685 percent
, so far this year, the yield has fallen about 29
basis points from 0.98 percent. The 10-year U.S. Treasuries
yield also fell about as much.
The market's mood is strong, but some analysts warn that JGB
yields may have fallen too low, ignoring better-than-expected
economic data in recent days.
Japan's industrial output in October rose 1.8 percent, data
showed last week, despite economists' forecast of a 2.2 percent
drop, raising hopes Japan may avert a recession.
"There are signs of improvement in the global economy and
Japan's output seems to be on the mend. I think JGB yields are
more likely to rebound than not," said Katsutoshi Inadome, fixed
income strategist at Mitsubishi UFJ Morgan Stanley Securities.