November 1, 2012 / 7:31 AM / 5 years ago

JGBs fall but off session lows after solid 10-year sale

* Bid-to-cover ratio at 10-yr sale rises to 4.05

* 10-yr yields remain locked in 4 bp range since Sept. 24

* Superlong sector slightly higher

By Lisa Twaronite

TOKYO, Nov 1 (Reuters) - Japanese government bonds mostly fell on Thursday, but were off the session’s lows after a 10-year sale went as smoothly as most market participants had expected.

Prices remained in recent ranges as investors awaited a cue from U.S. debt markets, with Friday’s U.S. employment data and Tuesday’s presidential election in focus.

The Ministry of Finance offered 2.3 trillion yen ($29 billion) worth of 10-year notes, reopening the number 325 issue with a coupon of 0.8 percent, the third time that issue was offered.

The ministry sold the bonds at a lowest accepted price of 100.20, in line with market expectations. The bid-to-cover ratio was 4.05, up from 3.40 at the previous tender, and the tail between the average and lowest accepted prices shrank slightly to 0.01 from 0.02 at the previous sale.

The solid results were not enough to jar benchmark yields out of the 4 basis-point range between 0.755 percent and 0.795 percent in which they have moved since Sept 24.

“The auction was uneventful,” said Keiko Onogi, senior JGB strategist at Daiwa Securities. “Ahead of the U.S. payrolls data and election, it is difficult to make big moves in the JGB market.”

Reopenings are offerings of securities with the same terms and conditions as an existing one, used to increase the liquidity of an outstanding issue.

“It is noteworthy that last week’s 5-year sale was also a reopen, as was the 20-year sale before that. This shows how stably JGBs have been trading lately,” said a fixed-income fund manager at a Japanese asset management firm.

Against this backdrop of low volatility, recent 10-year sales have met strong market demand, as the benchmark bond is the most liquid and has recently offered higher carry and rolldown compared with other sectors, market participants said.

In a carry and rolldown strategy an investor buys a bond and aims for capital gains, as a bond’s value increases as it matures if the yield curve is steady.

The 10-year yield added half a basis point to 0.775 percent, after rising as high as 0.785 percent before the auction results, its highest since Oct. 23.

Ten-year JGB futures closed down 0.11 point at 144.14, above a session low of 143.91 before the auction results.

The recently-battered superlong sector stabilised. Yields on 20-year debt fell 1 basis point to 1.680 percent, while those on the 30-year bonds also lost a basis point to 1.940 percent.

Political uncertainty is one factor that has weighed on longer-dated JGBs, market participants say.

Primary dealers in Japanese government bonds warned the finance ministry last week of the growing risk of a ratings downgrade over a political standoff on passing a deficit-financing bill needed to fund this fiscal year’s budget. While most investors expect the government to pass the bill, its failure to do so could interrupt JGB issuance.

“The threat that the political impasse will force the MOF to cancel a bond auction is credit negative,” Moody’s Investors Service warned in a report on Thursday.

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