November 26, 2012 / 2:55 AM / in 5 years

JGBs firm, superlongs up ahead of expected pension demand

TOKYO, Nov 26 (Reuters) - Japanese government bond prices firmed on Monday, with longest maturities snatched up on bargain-hunting after their underperformance in the past week and ahead of likely month-end buying by pension funds.

* The 10-year JGB futures rose 0.05 point to 144.59 , snapping their four-day losing streak, despite a rise in Japanese share prices on Monday.

* Long-dated JGBs had been under pressure since last week when Japanese Prime Minister Yoshihiko Noda called an election on Dec. 16, as the main opposition party leader Shinzo Abe, likely Japan’s next prime minister, urged the Bank of Japan to adopt more aggressive easing.

* A series of Abe’s proposals -- including setting a higher inflation target and sub-zero interest rates -- have sparked a sell-off in the yen, a rally in Japanese shares and a steepening in the JGB yield curve.

* As the spread between 10- and 20-year yields rose to 95 basis points last week, highest level since 1999, some bargain-hunting kicked in in the 20- and 30-year sector on Monday.

* The 30-year yield fell 1.5 basis point to 1.935 percent and the 20-year yield also fell 1.5 basis point to 1.670 percent.

* They were also helped by expectations of month-end duration extensions by pension funds. They often buy long-dated bonds to extend their portfolio’s duration to match the index.

* In contrast, the benchmark 10-year bond yield was flat at 0.735 percent. Still, that is close to a nine-year low of 0.720 percent hit in July and market players say JGBs look firm considering that Japan’s Nikkei share average hit a 6 1/2-month high.

* “Many bond market players think the latest rise in Japanese shares is a bit excessive. It’s not like investors are drastically shifting their portfolio in favour of stocks over bonds,” said Naomi Muguruma, senior bond strategist at Mitsubishi UFJ Morgan Stanley Securities.

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