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JGB gains as steepening trade unwound ahead of BOJ
January 21, 2013 / 7:26 AM / 5 years ago

JGB gains as steepening trade unwound ahead of BOJ

* Superlong outperform, steepener unwound
    * Some see BOJ disappointment given high expectations
    * Short-term notes could be hit if BOJ does not cut rates

    By Hideyuki Sano
    TOKYO, Jan 21 (Reuters) - Long-dated Japanese government
bond prices gained on Monday, ahead of the Bank of Japan's
policy announcement, as players took profits on their bets the
yield curve would steepen.
    Traders said some market players seem to be worried the BOJ
may not live up to unusually big market expectations for its
two-day policy meeting ending on Tuesday, an outcome that is
likely to hurt share prices and benefit low-return bonds.
    "Looking at price actions, it seems like the bond market is
betting that there will be some disappointment in the stock
market tomorrow," said a bond trader at a Japanese brokerage.   
    The 10-year JGB futures contract rose 0.16 point to
144.41, moving toward Thursday's intraday high of 144.50, which
was its highest since Dec. 13.  
    In the cash bond market, longest maturities such as 30-year
bonds, outperformed shorter peers, in a move driven by the swap
market, where some players took profits from steepening bets.
    As the 30-year swap rate fell sharply, the 30-year bond
yield fell 3.0 basis point to 1.970 percent while
the 10-year yield fell just 1.5 basis point to 0.735 percent
    Japan's Nikkei share average slipped more than 1.5
percent on Monday, also on profit-taking ahead of the BOJ's
decision. On Friday, it had reached a 32-month high after its
biggest one-day gain in nearly two years.
    Investors expect the BOJ to set a 2 percent inflation target
and increase its asset purchases and make an open-ended
commitment to them. Some think the BOJ could cut interest rates
on excess reserves or expand the target of its asset purchase.
    "The market has partially priced in the chance of cutting
rates. So if the BOJ doesn't, short-term bonds may stumble a
bit," said Toru Yamamoto, chief fixed income strategist at Daiwa
    The two-year JGB yield hit a 7 1/2-year low of
0.070 percent on Friday on growing expectations the BOJ might
cut or scrap its 0.10 percent interest payment on excess
reserves. The two-year notes were untraded on Monday.
    But Yamamoto said that losses will be limited because the
market will think the BOJ will take such a step after a new
governor takes over from current chief Masaaki Shirakawa, whose
term ends in April.
    Also on Tuesday, the Ministry of Finance will hold some of
its regular periodic meetings with primary JGB dealers.
    "I think the main topic should be fiscal year '13 budget
formation and JGB issuance schedule," said Naomi Muguruma,
senior strategist at Mitsubishi UFJ Morgan Stanley Securities.
"The timing is not related to the BOJ meeting, it's that the
government at the end of last week is mostly done with fiscal
year '13 budget blueprint."

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