January 18, 2013 / 7:19 AM / 5 years ago

JGBs mostly slip as stocks soar; BOJ expectations lift front end

* BOJ may pledge open-ended buying, scrap interest on banks'
    * 2-yr yield inches down to 7 1/2-yr low; yield curve
    * Superlongs sag even as Abe advisor downplays risk of

    By Lisa Twaronite
    TOKYO, Jan 18 (Reuters) - Japanese government bonds mostly
slipped on Friday as a weaker yen lifted the stock market, while
expectations of further policy easing by the Bank of Japan next
week lifted shorter maturities.
    The yield curve steepened, with the yield on relatively
illiquid 2-year JGBs easing to a 7-1/2-year low,
while yields in the superlong tenor reached for multi-month
highs touched a week ago. 
    At its two-day meeting ending on Tuesday, the BOJ will
consider scrapping interest it pays on banks' reserves and
pledging to buy assets on an open-ended basis until 2 percent
inflation is foreseen, sources familiar with the central bank's
thinking said. 
     "I wouldn't be surprised to see them cut the paid interest
on excess reserves, and it seems the market is pricing it in
already," said Maki Shimizu, senior strategist at Citigroup
Global Markets Japan.
    The 10-year JGB yield rose 2 basis points to
0.750 percent, moving away from Thursday's intraday low of 0.730
percent, its lowest since Dec. 17.     
    Koichi Hamada, special economic adviser to Prime Minister
Shinzo Abe, told a news conference on Friday that the BOJ was
likely to take some form of easing measures next week.
    He also said acknowledged the risk of inflation fuelled by
an oversupply of money but said there was no ground for
substantial inflation now, a statement likely aimed at quelling
inflation concerns that have weighed on superlong bonds in
recent weeks.
    The 10-year JGB futures contract ended down 0.13
point at 144.25, snapping its five-session winning streak and
pulling away from Thursday's intraday high of 144.50, which was
its highest since Dec. 13.  
    Japan's Nikkei share average soared 2.9 percent on
Friday as exporters gained on expectations that the central bank
will ease monetary policy aggressively next week, putting more
downward pressure on the yen. 
    "The rally in shares is taking demand away from JGBs
overall, but expectations of more BOJ easing is limiting losses,
and is pushing up short- and medium term notes," said a
fixed-income fund manager at a Japanese asset management firm in
    The yield on the 2-year JGB, which is often
inactive in cash trading, slipped half a basis point to 0.070
percent, its lowest since July 2005.
    The 5-year JGB yield also shed half a basis
point to 0.150 percent, matching lows hit this week and last,
and within sight of its record low of 0.145 percent hit during
Japan's banking crisis in June 2003. 
    The superlong tenor dropped, with pension funds said to be
selling, though yields remained well off highs hit a week ago. 
    The yield on the 20-year bond added 3 basis
points to 1.765 percent, moving back towards Jan. 11's high of
1.805 percent, its highest since April 2012.
    The 30-year bond yield rose 2.5 basis points
to 1.995 percent, moving back toward Jan. 11's high of 2.025
percent, its highest since August 2011.

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