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JGBs supported by BOJ easing expectations
April 19, 2012 / 6:55 AM / in 6 years

JGBs supported by BOJ easing expectations

* Open interest on 10-yr futures soars to Aug 2010 levels

* BOJ duration extension expectations anchor 2-, 5-yr tenors

* Japanese investors turn net buyers of foreign bonds last week

By Lisa Twaronite

TOKYO, April 19 (Reuters) - Japanese government bond prices were narrowly mixed on Thursday but remained wedged in recent ranges by expectations of further easing steps by the Bank of Japan next week.

BOJ Governor Masaaki Shirakawa said late on Wednesday in New York that the central bank is “fully committed” to continuing “powerful monetary easing” through various measures, such as keeping interest rates practically at zero and purchasing financial assets until 1 percent inflation is in sight.

The yield on the latest 10-year JGBs was flat at 0.935 percent, not far from a 17-month low of 0.930 percent hit on Monday. For the past two weeks, the 10-year yield has been trading under the 1 percent mark, which is viewed as key support.

June 10-year JGB futures reversed morning losses and finished up 0.05 point at 142.67.

Open interest on the benchmark JGB futures contract this month has risen to its highest levels since August 2010, which could suggest a buildup of long positions ahead of the BOJ meeting.

Sources have said that the BOJ might ease at its next meeting on April 27 by expanding its 65 trillion yen asset-buying and loan programme by 5 trillion or 10 trillion yen, with the increase to be used for purchases of government bonds.

“The market is now expecting the BOJ to do something. It’s already priced in,” said Le Ngoc Nhan, a JGB strategist at Morgan Stanley.

The shorter end of the yield curve was anchored by the BOJ expectations, with the 5-year yield creeping down half a basis point to 0.285 percent, while the yield on the 2-year JGB also lost half a point to 0.105 percent.

The BOJ buys bonds with up to two years left to maturity, so the five-year tenor has outperformed as many market participants expect policymakers to extend the maturities, perhaps as early as next week.

“The 5-year rate is below 30 basis points, so even if an expansion is announced, I don’t think it’s going to drive rates any lower than they are now,” Nhan said.

The 20-year JGB also gained slightly, with its yield easing half a basis point to 1.710 percent, while the 30-year JGB slightly underperformed, its yield adding 1 basis point to 1.900 percent.

Capital flows data from Japan’s Ministry of Finance showed on Thursday that Japanese investors were net buyers of foreign bonds last week after large net selling in the first week of the new fiscal year, while foreign investors also turned net buyers of Japanese bonds last week.

“It’s hard to draw conclusions about trading patterns before Golden Week, because activity typically picks up after the holidays,” said a fixed-income fund manager at a Japanese asset management firm, referring to the series of holidays that begin on April 29.

The JGB market shrugged off separate data showing Japan’s exports rose in March from a year earlier for the first time in six months, though the country’s trade balance returned to a deficit last month.

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