February 19, 2013 / 2:31 AM / 5 years ago

Five-yr JGB yield at record low; BOJ debates buying longer-dated govt bonds

* Five-year yield falls to 0.130 pct

* MOF offers 5-year JGBs with record low coupon of 0.1 pct

By Dominic Lau

TOKYO, Feb 19 (Reuters) - Japanese government bonds rose on Tuesday, with the five-year yield hitting a record low ahead of an auction later in the day, after Bank of Japan minutes revealed board members had discussed buying longer-dated government debt at their January meeting.

A few members of the nine-member board said one option could be to extend the duration of government bonds purchased to around five years, the minutes showed, a move that would help push down the longer-end of the yield curve.

“That’s really supportive,” said Maki Shimizu, senior strategist at Citigroup Global Markets Japan, referring to the market move.

Under its asset-buying programme, the BOJ buys government bonds with up to three years until maturity, as well as other assets such as corporate debt, to pump money into the economy.

The five-year yield slipped 1 basis point to 0.130 percent to a record low, helping set the coupon of the auction of 2.7 trillion yen ($28.73 billion) worth of similar maturities at 0.1 percent, the lowest since Japan started issuing five-year bonds in 2000.

Analysts expect decent demand at the auction, as investors have been piling into short- and medium-term sectors on expectations that the BOJ will take further steps to whip deflation and achieve its target of 2 percent inflation.

“Fives offer small gains, but very limited downside,” said Neale Vincent, strategist at Nomura Securities in Tokyo.

“Investors seem to think that up to five years is rock-solid safe,” he said.

The 10-year yield eased 1 basis point to 0.730 percent to a three-week low, while 10-year JGB futures gained 21 ticks to 144.48, breaking above their five-day moving average of 144.28.

Yields on 30-year debt edged down 1 basis point to 1.905 percent, reaching a two-month low and on track to fall for the seventh straight session, while those on 20-year bonds dipped 0.5 basis point to 1.730 percent

The long-end of the yield curve was supported by buying interest from life insurers ahead of Japan’s financial year ending March 31.

“Historically, seasonal flattening pressure has been strongest in the 10-year and longer sectors of the curve between mid-February and early March,” Barclays said in a note.

“In addition to the fiscal year-end build-up by life insurers and other participants, this year will probably also bring substantial demand for rebalancing by pension funds accompanying the rise in share prices. Typically, the curve shows a seasonal tendency to flatten into early March.”

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