November 30, 2012 / 7:21 AM / in 5 years

Benchmark JGBs recover, pushing yields to 9 1/2 year low

* Yield curve steepens as superlong tenor underperforms

* Month-end extension buying supports prices late in session

By Lisa Twaronite

TOKYO, Nov 30 (Reuters) - Benchmark Japanese government bonds recovered in late trading on Friday, with benchmark yields hitting a fresh 9-1/2-year low on month-end buying even as the superlong tenor continued to underperform.

The current 10-year cash JGB yield shed half a basis point to 0.705 percent, down from a session high of 0.720 percent, and reaching its lowest level since June 2003, according to Reuters data.

“Dealers are setting up for the 30-year auction. It looks like in the 10-year sector, inventory is light, so dealers are setting up for the 10-year auction shorting the long end of the curve,” said Tadashi Matsukawa, head of Japan fixed income at Pinebridge Investments in Tokyo.

The Ministry of Finance will offer 2.3 trillion yen of 10-year bonds on Tuesday and 700 billion yen of 30-year bonds on Thursday.

“The market is starting to form a top, but it looks like extension buying will come in,” Matsukawa added.

Pension funds often buy longer-dated bonds to extend their portfolio’s duration to match the index.

The benchmark 10-year JGB futures price closed up 0.03 point at its Friday high of 144.86, just one tick short of its Thursday high of 144.87, a peak since June 2003. Futures ended morning trade down 0.08 point at 144.75.

Japanese equities advanced on Friday, with the Nikkei share average rising 0.5 percent to a seven-month closing high. Stronger stocks initially sapped the appeal of bonds, with JGBs down for most of the session.

The yield curve steepened, with yields on 20-year bonds and 30-year bonds both rising 1 basis point to 1.675 percent and 1.940 percent respectively.

Yields on 5-year bonds also hit a their lowest level since June 2003 late in the session, dropping half a basis point to 0.165 percent.

Even as benchmark yields fell to record lows, superlong maturities have underperformed in recent weeks and the yield curve has steepened on political concerns. Investors expect more pressure on the Bank of Japan to take aggressive easing steps after an election on Dec. 16 that will likely result in a new government.

Members of the BOJ’s elite monetary affairs department have been drawing up plans for a bolder set of policy options since late last year, people with knowledge of those discussions say, as the bank mulls a “big bang” approach to fighting deflation.

Japan opposition leader Shinzo Abe, seen as the front runner to become prime minister, said in a joint debate of party leaders on Friday that he would leave it to the central bank to decide on specific ways to achieve its policy objectives.

Market reaction was muted to a surprise jump in Japan’s industrial output in October, though the news added to the JGB market’s weak tone in the morning.

Core consumer prices were flat in October compared with a year earlier. The November index for Tokyo, available a month before the nationwide data, showed a drop of 0.5 percent.

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