December 27, 2012 / 7:26 AM / 5 years ago

JGBs under pressure as 10-year yield rises to 3-month high

* 10-yr futures end down after touching 3-month low
    * 20-yr yield rises to 8-month high

    By Lisa Twaronite
    TOKYO, Dec 27 (Reuters) - Benchmark Japanese government
bonds slipped on Thursday, with the 10-year yield edging up to
the 0.8 percent level for the first time in three months as
conviction grew that the new government of Premier Shinzo Abe
will push hard on fiscal and monetary stimulus.
    With demand for bonds undermined, Japan's Nikkei share
average climbed to a 21-month high on Thursday, led by
exporters and financials, as Abe's vow to battle deflation
pushed the yen to a more than two-year low against the dollar.
    "It's a very light market, so I'm not too sure if we can
substantiate much from this price action, but I guess it is a
positive kick for Abe, in a sense," said Shogo Fujita, chief
Japan bond strategist at Bank of America Merrill Lynch.
    "We are on the way up, but [the benchmark yield] is not
going past 1 percent yet," he said. "This is a trade about Japan
playing catch-up with other Western countries. It's not about
Japan changing."     
    The 10-year yield added 1.5 basis points to
0.800 percent, its highest level since Sept. 21. 
    The benchmark 10-year JGB futures contract ended
down 0.16 point at 143.50, just two ticks above its session low,
which was the lowest level since Sept. 18.        
    Japan's new Finance Minister Taro Aso said on Thursday that
Abe has ordered him to compile a stimulus package without
adhering to a previously agreed cap on new bond issuance.
    Japan's previous government agreed to limit new bond
issuance to 44 trillion yen ($519 billion), to help prevent the
country's public finances from deteriorating. 
    "Aso didn't say anything unexpected, and I think most market
participants are already bracing for more issuance next year as
the new government carries out its pledge for massive fiscal
stimulus," said a fixed-income fund manager at a Japanese asset
management firm in Tokyo.
    Aso said late on Thursday that the government would not rely
solely on bond issuance to fund an extra economic stimulus
package, and would try to limit fresh issuance to ensure market
confidence when compiling an annual budget for the next fiscal
     Yields on 20-year bonds also added 1.5 basis
points to 1.760 percent, their highest since April 6. Their
spread over 10-year yields rose to 96 basis points, up from 95
basis points earlier in the week and approaching this month's
high of 99 basis points. 
    Benchmark JGBs have lost 5.7 percent in 2012 in dollar-based
terms, according to Reuters data.
    Friday will mark the last trading day ahead of the long New
Year's holiday in Japan. Markets here will reopen on Jan. 4.

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