* Strong expectations of BOJ easing support markets
* Ten-yr yield reaches nearly 10-yr low of 0.675 pct
* Thirty-yr yield tugs 5-month trough, 20-yr at 2-month low
By Dominic Lau
TOKYO, Feb 26 (Reuters) - Japanese government bond prices rose on Tuesday, with the five-year yield sinking to a record low and the 10-year yield hitting a near 10-year trough, as Italy’s deadlocked election outcome raised concerns 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 2.5 basis points to 0.680 percent after falling as much as 0.675 percent to its lowest level since June 2003, 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 purchases 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 three.
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 from 2014.
But Akito Fukunaga, chief rates strategist at Royal Bank of Scotland in Tokyo, said if the BOJ were to announce extending the maturity of its bond buying programme under the new governor in April, the 10-year yield could fall further. The 10-year yield touched a record low of 0.430 percent in June 2003.
“The announcement to buy long-dated bonds should come at the April meeting. That should drive the 10-year yield to 50 basis points, in our view, after the April meeting,” Fukunaga said.
The 30-year yield eased 3 basis points to 1.870 percent to a five-month low on Tuesday and the 20-year yield fell 2.5 basis points to 1.680 percent, tugging at a two-month low.