* Ten-year yield reaches two-month low of 0.685 pct
* Strong expectations of BOJ easing support markets
By Dominic Lau
TOKYO, Feb 26 Japanese government bond prices
rose on Tuesday, with the five-year yield hitting a record low,
as Italy's deadlocked election outcome raised fears the euro
zone debt crisis could resurface.
Italy's centre left won the lower house as widely expected
but no party or likely coalition appeared likely to be able to
form a majority in the upper house or Senate, creating a
deadlocked parliament, which could threaten the country's
economic reforms and reignite the euro zone debt crisis.
Mounting expectations of more drastic easing steps from the
Bank of Japan to revive the ailing economy also helped push
yields down to levels that some analysts said were "overly
priced in" by the markets.
"It's very, very difficult to justify this yield level. But
as the Federal Reserve has done something similar in the last
few years, it's possible for the central bank to engineer lower
rates for longer," said Shogo Fujita, chief Japan bond
strategist at Bank of America Merrill Lynch.
"That's what is expected from the BOJ under this new regime
under (Haruhiko) Kuroda-san or whoever it may be."
The five-year yield inched down 0.5 basis
point to 0.115 percent, breaking the previous low of 0.120
percent hit on Monday after sources said Asian Development Bank
President Kuroda, an advocate of aggressive monetary easing, was
likely to be nominated as the next BOJ chief.
The 10-year yield slipped 2 basis points to
0.685 percent, touching its lowest level since Dec. 6, while
10-year JGB futures climbed 17 ticks to 144.84 after
climbing to a two-month high of 144.95.
Fujita said his model showed the markets had already priced
in a 40 trillion-50 trillion yen ($426 billion-$533 billion)
expansion of asset purchase by the central bank, a 5 basis
points cut in interest rates on reserves and a 80 percent chance
of lengthening the maturity of JGB purchases to five years from
The BOJ has already pledged to pump 101 trillion yen into
the economy by the end of this year through its asset purchases
and lending programme, and will shift to open-ended purchases
The 30-year yield eased 2.5 basis points to
1.875 percent and the 20-year yield fell 1.5
basis points to 1.690 percent, tugging at a two-month low.