July 24, 2018 / 5:16 AM / a month ago

JGBs edge up after sliding on BOJ speculation, 40-yr sale draws demand

TOKYO, July 24 (Reuters) - Japanese government bond prices edged higher on Tuesday, with the market catching a breather after sliding sharply the previous day on speculation that the central bank was looking at scaling back its massive monetary stimulus.

The benchmark 10-year JGB yield was half a basis point lower at 0.075 percent.

On Monday, the yield jumped 5 basis points, its biggest one-day surge since August 2016, after Reuters and other media reported that the Bank of Japan was holding preliminary discussions on possible changes to its monetary policy.

However, the BOJ’s offer to buy an unlimited amount of five- to 10-year JGBs in a special operation helped halt the yield surge.

“A bit of calm has returned to the JGB market after yesterday’s special buying operation by the BOJ,” said Katsutoshi Inadome, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.

“The BOJ has shown that it is poised to still control yields, at least through its policy board meeting,” he said.

The central bank’s two-day board meeting begins on July 30.

According to the recent media reports, possible policy changes on the agenda include adjustments to interest-rate targets to make the BOJ’s massive stimulus programme more sustainable.

The BOJ has been buying JGBs as part of its yield curve controlling scheme, but concerns have grown that the central bank could eventually run out of bonds to purchase if it keeps absorbing huge amounts of debt.

Tuesday’s 400 billion yen ($3.59 billion) 40-year JGB auction attracted sufficient demand, with the previous day’s market slide seen as lowering the new bonds’ prices to attractive levels.

At the 40-year auction, the bid-to-cover ratio - a gauge of demand - slipped to 3.30 from 3.92 at the previous one in May, but it was above 3.20, the average from the past 10 sales.

The 40-year yield declined 1 basis point to 0.900 percent after rising more than 10 basis points on Monday to a six-month peak of 0.910 percent.

$1 = 111.3000 yen Reporting by the Tokyo markets team; Editing by Richard Borsuk

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