* New 10-yr bonds attract solid demand despite low coupon
* Investors opt for 10-yr bonds as shorter yields too low
* Superlongs under pressure, yield curve steepest since 1999
By Hideyuki Sano
TOKYO, Dec 4 (Reuters) - Japanese government bond prices ended flat on Tuesday, having erased earlier losses after an auction of new 10-year debt attracted strong demand despite its low coupon rate.
On top of the prospects of a recession in the Japanese economy, JGBs were also supported by expectations that a likely change in the Japanese government in the Dec. 16 election could lead to more aggressive easing by the Bank of Japan.
The 10-year JGB futures fell ended flat at 144.87, a whisker off the 9 1/2-year high of 144.91 hit on Monday. The current 10-year bond yield was flat at 0.700 percent .
“At the moment, the new issue does not look cheap on the yield curve. But I do expect its yield to fall to around 0.7 percent,” said Keiko Onogi, senior JGB strategist at Daiwa Securities.
The Finance Ministry sold 2.3 trillion yen ($28 billion) of fresh 10-year bonds at a highest yield of 0.732 percent in an auction, a slightly lower yield than market expectations.
Although the issue had the lowest coupon rate for 10-year paper since June 2003, at 0.7 percent, that did little to weaken demand.
Investors such as Japanese regional banks are thought to be stepping up buying in the 10-year tenor in recent months, as yields on five-year bonds, their bread-and-butter portfolio, have fallen to paltry levels, analysts said.
“The auction confirmed investors’ strong demand. Some investors have no choice but to buy beyond the five-sector to earn income gains,” said Yuya Yamashita, rates strategist at JPMorgan.
The five year yield stood at 0.170 percent, near the nine-year low of 0.165 percent touched twice earlier this year.
Opposition leader Shinzo Abe, a front-runner to become prime minister after the Dec 16. election, has called for unlimited monetary easing to achieve inflation of two percent, triggering falls in short and medium-term bond yields.
There remain doubts on exactly how far Abe can change BOJ policy, given that the BOJ is already buying a large amount of bonds.
But his proposals have pushed the yen down, lifted Japanese share prices and made investors reluctant to buy longer maturities such as 20- and 30-year bonds, which would fare badly if a were adopted that boosted inflation along with the economy.
The 20-year yield rose 1.0 basis point to 1.685 percent . Its spread over the 10-year yield rose to 98.5 basis points, near a record high of 101 basis points in hit in June 1999.
The 30-year bond yield also rose 0.5 basis point to 1.950 percent, as the market braced for an auction of 700 billion yen ($8.5 billion) 30-year bonds on Thursday.
“At the moment, I can’t see the end in the steepening. Superlongs are likely to keep underperforming for now,” said Daiwa’s Onogi.