October 19, 2017 / 5:27 AM / a year ago

Benchmark JGBs firm, underpinned by solid 5-year sale

TOKYO, Oct 19 (Reuters) - Japanese government bonds were mostly firm on Thursday, underpinned by a solid five-year auction, though longer maturities succumbed to pressure from U.S. Treasuries.

The benchmark 10-year cash JGB yield edged down half a basis point to 0.060 percent in afternoon trade, while the 10-year JGB futures contract was 0.06 point higher at 150.42.

The five-year JGB yield fell one basis point to minus 0.090 percent.

Superlong maturities lagged slightly, with the 20-year JGB yield adding half a basis point to 0.595 percent, after earlier rising as high as 0.605 percent, its highest since July 14.

“The short end of the curve is trading firmer, mainly because of foreign investors buying dollar-yen basis swaps, the 10-year zone is not going anywhere, and the longer end is slightly heavier,” said Naomi Muguruma, senior strategist at Mitsubishi UFJ Morgan Stanley Securities.

Foreign investors can borrow the yen at deeply negative interest rates using swaps, which has underpinned demand for shorter JGBs even as their yields have remained lodged in negative territory.

At the Ministry of Finance’s sale of 2.2 trillion yen of five-year JGBs with a 0.10 percent coupon, 88.7951 percent of the bids were accepted at the lowest price of 100.90.

The sale drew bids of 4.24 times the amount offered, up from the previous sale’s bid-to-cover ratio of 4.07 times, indicating stronger demand.

Rising U.S. Treasury yields kept upward pressure on their Japanese counterparts, which was reflected mainly in superlong JGBs.

The two-year Treasury yield rose to its highest since November 2008 on Wednesday on expectations of tighter global monetary policy.

The benchmark U.S. 10-year Treasury yield touched a one-week high of 2.352 percent on Wednesday, and last stood at 2.341 percent.

Bank of Japan Deputy Governor Hiroshi Nakaso said in a speech on Wednesday in New York that the Japanese central bank would make adjustments to the shape of the yield curve as necessary, taking into account developments in the economy, prices and financial conditions.

Japan’s yield curve over the past year has been formed smoothly in line with the BOJ’s market operations guidelines, Nakaso said, adding that it was “quite possible” to continue to facilitate the formation of a yield curve seen most appropriate for hitting the bank’s 2 percent inflation goal. (Reporting by Tokyo markets team; Editing by Sunil Nair)

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