December 17, 2012 / 7:06 AM / 5 years ago

Long-end JGBs slip on election, 20-yr yield at 8-month high

* Longest maturities suffer from concern on fiscal easing

* Abe may issue debt to finance supplementary budget

* Hopes for more BOJ bond buying support shorter maturities

* BOJ seen adopting 2 pct inflation target Abe wants

By Hideyuki Sano

TOKYO, Dec 17 (Reuters) - Long-dated Japanese government bonds fell on Monday, with the 20- and 30-year yields hitting eight-month highs after an election victory by the Liberal Democratic Party (LDP) raised the possibility of aggressive monetary easing and more spending.

“Long-end bond yields will keep rising gradually. That’s unlikely to stop. There are concerns that the new government may compile a bigger supplementary budget and raise bond issues even during this fiscal year (to March),” said Akito Fukunaga, chief rates strategist at RBS.

The LDP’s policy platform is seen as negative for the longest maturities because it could, if successful, boost economic growth, and even if unsuccessful in boosting growth, could still lift inflation.

Either way, long-dated bonds are likely to suffer while shorter maturities are likely to benefit from bolder monetary easing, which is likely to involve more buying of short-term debts.

The 30-year bond yield rose 1.5 basis points to 1.965 percent, its highest level since April while the 20-year yield edged up 2.0 basis points to 1.715 percent, also an eight-month high.

Shorter maturities were firmer, with the 10-year yield flat at 0.730 percent and the five-year yield also unchanged at 0.175 percent, as the Bank of Japan is expected to step up buying in shorter bonds in any future easing.

The 10-year JGB futures price fell 0.07 point to 144.23 .

“It is easy to predict a steepening in the yield curve. Investors know that five-year bonds are unlikely to be sold off,” said Tohru Yamamoto, chief strategist at Daiwa Securities.

The spread between the 10- and 20-year yields rose to 98.5 basis points, just below a 13-year high of 99 hit earlier this month.

Selling in “superlong” bonds, such as 20- and 30-year bonds, partly reflected caution ahead of a 20-year bond auction on Tuesday.

But many market players think the “superlong” sector is likely to underperform even after that, given wariness over the policy stance of a new government led by Shinzo Abe, who is due to be formally appointed as prime minister on Dec. 26.

Abe’s LDP had won 294 seats in the 480-member lower house, while its ally the New Komeito party took 31 seats, giving them a two-thirds majority needed to overrule parliament’s upper house in legislation.

Abe said on Monday he would compile a “large scale” extra budget to fight deflation.

Japan’s economy has contracted for two straight quarters, which some view as a definition of recession, and the BOJ’s tankan survey last week showed Japanese corporate sentiment worsened.

Some market players think the government will finance the stimulus by more borrowing, which would add to Japan’s already immense stockpile of public debt, which now amounts to about 200 percent of its GDP.

Abe also repeated he wants to have an accord with the BOJ to have an inflation target of two percent and market players think the BOJ will eventually heed his calls in one way or another.

Less certain is whether the BOJ will take fresh easing steps this week. Market players now feel there is a 50 percent chance, or even slightly less, of the BOJ increasing its asset purchase programme at its meeting on Wednesday and Thursday.

“Given the yen is sharply weaker and that the worsening in the tankan was widely in line with expectations, my impression is there is a less than 50 percent chance of increase in asset buying this week,” said Fukunaga at RBS.

Abe is also likely to try to install a dovish central banker to replace the current chief Masaaki Shirakawa when his term expires in April — a factor that has been supporting steepening bets.

Still, unlike bills which Abe can push through by using his two-thirds majority in the more powerful lower house, the central bank’s top job needs approval from both houses of the parliament, including the upper house, which will remain under the control of the Democratic Party.

That means Abe needs to find a BOJ candidate who is acceptable to the Democrats.

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