March 15, 2013 / 7:26 AM / 5 years ago

JGBs steady as government approves new BOJ leadership

* 20-yr JGBs rise after dropping on lackluster sale on Thurs

* 10-yr yield flat, not far from near-decade low hit last week

TOKYO, March 15 (Reuters) - Japanese government bonds held steady, with yields not far above record lows hit last week as the government on Friday gave its official nod to a new Bank of Japan leadership that is expected to proceed with aggressive monetary easing.

The 20-year sector, which sagged in the previous session after a lackluster auction of those bonds recouped some of their losses.

Japan’s parliament approved Haruhiko Kuroda to take the helm of the BOJ, as well as nominees Kikuo Iwata and Hiroshi Nakaso to be Kuroda’s deputies.

“It will be interesting to watch Kuroda and Iwata trying to prove what they have been arguing for years, that if you buy enough bonds, Japan can escape deflation,” said Neale Vincent, strategist at Nomura Securities in Tokyo.

The BOJ is now constrained by its so-called “banknote rule,” which limits its longer-term JGB holdings to the amount of outstanding banknotes. The rule was established in March 2001, when the BOJ embarked on its earlier round of quantitative easing.

If the BOJ were to scrap the banknote rule, which Vincent said is “likely,” it would be able to more freely buy weaker areas, such as the 15-year to 20-year sector.

“Because of its banknote rule, the central bank ends up buying huge amounts in the short end and almost nothing on the long end, resulting in a steep curve past 10-years and big supply/demand imbalances along the curve,” he said.

“Over the next three months, the BOJ will likely switch its JGB buying to a style quite different from what we are used to.”

The 10-year yield was flat at 0.620 percent, holding above a low of 0.585 percent hit last week, which was its lowest since June 2003.

Ten-year JGB futures rose 0.02 point to end at 145.19, within sight of their all-time record high of 145.50 struck one week ago.

A tenth straight record close for the Dow Jones industrial average buoyed investors’ risk tolerance, and helped push up Japanese equities. The Nikkei share average closed at a new 4-1/2 year high.

Stock market gains mean some Japanese funds must continue to buy bonds through the close of the fiscal year at the end of this month, in order to meet their asset allocation targets.

The 20-year yield slipped 1 basis point to 1.610 percent, while the 30-year bond yield lost half a basis point to 1.765 percent.

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