* JGBs down ahead of 20-year bond auction on Thursday
* Nikkei rally to 52-month high also negative for JGBs
* Expectations of more BOJ bond buying underpins market
By Hideyuki Sano
TOKYO, Feb 20 Japanese government bond prices
eased on Wednesday ahead of a 20-year JGB auction and on a rally
in Japanese shares, lifting the five-year yield from its record
low hit the previous day.
Still, on the whole, the market was underpinned by
expectations that the Bank of Japan will likely expand its bond
buying to five-year bonds to cater to Prime Minister Shinzo
Abe's call for aggressive easing to end deflation.
Selling centred on the 20-year sector as brokers tried to
make room for the auction of 1.2 trillion yen ($12.8 billion) of
20-year JGBs on Thursday.
The 20-year yield rose 1.5 basis point to 1.755 percent
, underperforming all other maturities, though
market players also said it was a healthy correction after the
yield had fallen as much as six basis points during the past
In addition, a rise in Japanese share prices undermined
demand for low-risk, low-return JGBs. The Nikkei share average
rose 0.8 percent to a 52-month high.
The 10-year yield rose just 0.5 basis point to 0.740 percent
, after having hit a 3-1/2-week low of 0.730
percent on Tuesday.
The five-year yield also rose 0.5 basis point to 0.135
percent, up slightly from a record low of 0.130
percent set on Tuesday on expectations that the Bank of Japan
will soon start buying five-year bonds.
The minutes of the Bank of Japan's policy meeting showed on
Tuesday a few members of the nine-member board considered
extending the duration of government bonds purchased to around
five years from the current limit of up to three years.
With the BOJ under heavy pressure to achieve two percent
inflation, many investors expect the BOJ to soon expand its
asset buying programme and include five-year bonds in the
"It's almost seen as a done deal in the market," said Takeo
Okuhara, fund manager at Daiwa SB Investments. "And because
everyone now thinks the five-year yield will be almost fixed
(near zero), they are starting to feel it's safe to buy the
seven-year zone and even longer."
Such expectations also prompted investors to snatch up the
six- to seven-year zone, which still offers hefty returns
compared to five-year bonds.
The yield on the 304th 10-year bonds, which have 6-1/2 years
left to maturity, fell 1.0 basis point to 0.305 percent, bucking
the overall market direction.
While expectations of more bond buying by the BOJ bolstered
the market, some traders said they were uneasy about recent
gains in JGBs in light of recent weakness in the yen.
"Bond investors still believe there will be no inflation
because that's the way it has been for the past 20 years. But
the yen has clearly peaked out. I think the world has changed,"
said a trader at a Japanese bank.
The yen traded at 93.34 yen, not far from a 33-month
low of 94.47 yen hit earlier this month.
But concerns about inflation is still limited to a small
number of players. A Reuters poll showed 12 out of 20 economists
do not expect the BOJ to succeed in lifting inflation to two
percent in the next five years. Japan's core
consumer prices slipped for a second straight month in the year
to December, signalling the economy was still in deflation.
Prime Minister Abe is expected to nominate the bank's new
governor to succeed the current chief Masaaki Shirakawa, who
will step down next month.
Sources have said Abe's short list for governor includes
former deputy BOJ governor Toshiro Muto, Asian Development Bank
chief Haruhiko Kuroda and another former deputy BOJ governor
While difference between these candidates are seen as not
big, Muto is considered mildly positive for JGBs as he is
thought to prefer JGB buying as a way of easing while Iwata
could be negative as he has proposed buying foreign bonds
But perhaps the most negative outcome for bonds could be if
Abe chooses someone completely unknown to markets.
"If we have a completely different team of governor and
deputies, the market may get perplexed. That would reduce the
predictability of the BOJ's policy and push up the market's
volatility," said Naomi Muguruma, senior strategist at
Mitsubishi UFJ Morgan Stanley Securities.