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Superlong JGBs underperform on subdued demand for 20-yr auction
February 21, 2013 / 6:30 AM / in 5 years

Superlong JGBs underperform on subdued demand for 20-yr auction

* Bid-to-cover for 20-yr debt sale lowest since Aug

* Superlong JGB yields underperform, 10-yr yield down 0.5 bps

By Dominic Lau

TOKYO, Feb 21 (Reuters) - Prices on longer-dated Japanese government bonds eased on Thursday as demand for a 20-year debt auction was subdued, although a steep fall in Chinese shares prevented yields from moving much higher.

The sale of 1.2 trillion yen ($12.8 billion), 20-year debt drew a bid-to-cover ratio of 2.56, its lowest since August, even though the issue offered a coupon of 1.8 percent, its highest since March last year.

“The bid-to-cover was weaker than expected. I assume there was limited participation from banks. There was some interest from life insurance companies but not so much,” said Tadashi Matsukawa, head of Japan fixed income at PineBridge Investments.

“The auction itself was weak but in an environment like weak equities (in Tokyo), a weak euro going into the Italian election and a sharp decline in the Chinese equity market,” most traders weren’t keen selloff JGBs, he said.

The 20-year yield edged up 0.5 basis point to 1.760 percent after trading as much as 1.765 percent earlier in the session. The 30-year yield added 1 basis point, to 1.935 percent.

China’s CSI300 share index shed 3.9 percent on concerns that recent central bank behaviour signalled the start of a tightening cycle. In Tokyo, the Nikkei benchmark lost 1.4 percent, taking its cue from weakness on Wall Street overnight.

The spread between the 20- and 30-year bonds stood at 17.5 basis points, up from an 8-1/2-month low of 15.5 basis points touched in the previous session.

“The 20-year/30-year spread has been flattened since December. The pace of flattening has been overly rapid. It will not be a surprise if we see a temporary adjustment of the recent trend,” said Yuya Yamashita, rates strategist at J.P. Morgan.

Yields on benchmark 10-year bonds dipped 0.5 basis point to 0.735 percent, while 10-year JGB futures gained 8 ticks to 144.43.

Societe Generale said in a note that any yen strengthening against the dollar would support 20-year JGB as they were highly correlated recently.

“The 20-year JGBs and USD/JPY have been highly correlated in the last two months. Over the coming weeks, USD/JPY might fall,” the brokerage said in a note.

“For one, the Japanese administration is indicating that it is abandoning for now ideas to purchase foreign bonds. Any fall in USD/JPY will support 20-year JGB. And in terms of technicals, the 20-year JGB will be supported at 1.80 percent by domestic demand.”

Japanese Prime Minister Shinzo Abe said on Wednesday the need to establish a public-private sector fund to buy foreign bonds has declined.

The possibility of setting up such a fund, tasked with measures including purchases of foreign bonds, had been included in a campaign platform drawn up by Abe’s Liberal Democratic Party ahead of a national election last December.

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