December 13, 2012 / 7:36 AM / in 5 years

JGBs skid as Nikkei's rally on weaker yen undermines demand

* Yield curve steepens as superlong sector underperforms
    * Fed's stimulus puts more pressure on BOJ to act next week

    By Lisa Twaronite
    TOKYO, Dec 13 (Reuters) - Japanese government bonds tumbled
on Thursday after an uninspiring 5-year auction failed to blunt
the impact of surging Japanese equities, pushing benchmark
yields away from last week's 9-1/2-year low.     
    JGBs tracked a drop in U.S. Treasuries prices after the U.S.
Federal Reserve announced a new bond buying programme in the
previous session, while Japan's stock market rally also
undermined demand.
    The Nikkei gained 1.7 percent to close at an
eight-month high, led by a rally in exporters, as the yen 
dropped to its lowest level since March against the dollar.     
    Yields on 10-year JGBs added 2.5 basis point
to a two-week high of 0.725 percent, moving away from last
week's low of 0.685 percent, which was the lowest since June
    Ten-year JGB futures for March ended down 0.30
point at 144.40 point.   
    "We are very cautious of these levels. It might look like a
dip to those investors who are still bullish, but we remain
neutral for now, cautious of a bearish bias going forward," said
Maki Shimizu, senior strategist at Citigroup Global Markets
    "Below 0.7 percent for 10-year yields cannot be justified,
but until last week, the momentum was heading toward even lower
levels for yields," she said.    
    The Fed said it will buy $45 billion in Treasuries each
month on top of the $40 billion per month of mortgage-backed
bonds it started buying in September.    
    "The Fed's move adds to pressure already on the BOJ to act
next week," said a fixed-income fund manager at a European asset
management firm in Tokyo.  
    The Bank of Japan will meet on Dec. 19-20, and will most
likely increase its asset-buying and lending programme,
currently at 91 trillion yen ($1.1 trillion), by another 5-10
trillion yen, sources have said. 
    Japan's general election on Sunday is also likely to result
in more pressure on the BOJ to ease further. The opposition
Liberal Democratic Party is likely to secure a majority, and its
leader, Shinzo Abe, is already pushing the central bank to take
aggressive monetary steps. His pronouncements led to the
so-called "Abe trade" in recent weeks, characterised mainly by a
weaker yen.       
    "Initially, 'Abe trades' in fixed income seemed to focus
more on the negative aspects such as fear of fiscal
deterioration and loss of central bank independence, but
recently we are starting to see more positioning for economic
recovery," said Neale Vincent, strategist at Nomura Securities
in Tokyo. 
    "The curve past 10-years likely can remain steep while 10's
are between 0.7 percent and 0.8 percent but flatten outside of
that range. When we got below 0.7 percent in 10's recently,
investors started to take profits in that sector and shift up
the curve," he said.
    If the 10-year yields rise above 0.8 percent, the long end
should attract strong dip buying from life insurers, he added.
    The yield curve steepened on Wednesday as the superlong
sector underperformed, with yields on 30-year JGBs
 adding 4.5 basis points to 1.940 percent, while
those on 20-year bonds rose 4 basis points to
1.695 percent, their highest since Nov. 1.    
    The Ministry of Finance offered 2.5 trillion yen of 5-year
notes on Thursday with a coupon of 0.2 percent, matching that of
the previous seven sales. The lowest accepted price of 100.17
was in line with market expectations, but the sale's
bid-to-cover ratio came in at 3.54, down from 4.96 at last
month's sale. The tail between the average and lowest accepted
prices widened slightly to 0.01 from zero last month. 
    The 5-year yield rose half a basis point to
0.165 percent.
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