July 8, 2013 / 7:42 AM / in 4 years

JGBs slip in line with Treasuries, but domestic demand underpins prices

* 10-year yield rises but stays in recent trading range
    * This week's BOJ meeting eyed; no policy changes expected

    By Lisa Twaronite
    TOKYO, July 8 (Reuters) - Benchmark Japanese government bond
prices fell on Monday, tracking U.S. Treasury yields after U.S.
jobs data on Friday suggested the Federal Reserve will begin to
taper its bond-buying stimulus.
    Domestic demand limited losses, as did the Bank of Japan's
regular asset-buying operations. On Monday, the central bank
offered to buy outright 100 billion yen ($991.03 million) of
one- to three-year JGBs; 400 billion yen of three- to five-year
JGBs; and 500 billion yen of five- to 10-year JGBs.
    "Domestic investors are interested in buying on dips for
JGBs, probably 0.9 percent for the 10-year, and around the
middle of 0.3 for the 5-year, because of the differences in
economic conditions between the U.S. and Japan and the
differences in monetary policies," said Naomi Muguruma, senior
fixed-income strategist at Mitsubishi UFJ Morgan Stanley
    "We think the impact of high U.S. yields will remain limited
for the JGBs," she said.    
    The 10-year yield added 2.5 basis points to
0.880 percent, still in the 0.80 to 0.90 percent trading range
where it has held for the past five weeks.
    The 30-day JGB futures implied volatility has
been falling, hitting a two-month low on Friday of 3.74, from a
two-year high of 6.1 on April 12.
    Ten-year JGB futures ended down 0.33 point at
142.22 after earlier falling to a one and a half week low of
142.12. Volume was a relatively thin 23,290 contracts, though up
from Friday's two-month low of 18,443 contracts.       
    The JGB yield curve slightly steepened as the superlong
tenor underperformed, with the 30-year yield 
rising 3 basis points to 1.885 percent. The 20-year yield
 also increased 3 basis points to 1.760 percent.  
    "As long as the BOJ continues buying, Japanese yields will
take directional cues from U.S. yields but won't test new highs
as Treasuries did," said a fixed-income fund manager at a
Japanese asset management firm.
    The BOJ is widely expected to maintain its ultra-easy
monetary stance at its regular two-day policy meeting beginning
on Wednesday. It could revise up its assessment of the economy
to suggest that the world's third largest economy is recovering,
thanks in part to the government's reflationary policies.
    BOJ data released on Monday showed Japanese bank lending had
its biggest annual increase in four years in June, suggesting
the central bank's aggressive monetary stimulus is nudging
companies to make new investments.
    By contrast, the U.S. Federal Reserve is seen as likely to
begin to reduce its asset-buying stimulus. On Friday, the key
nonfarm payrolls report for June showed U.S. employers added
195,000 new jobs to their payrolls, beating expectations of
    That led to a sharp selloff in Treasuries on Friday, with
the 10-year yield suffering its biggest one-day rise
in nearly two years to the highest since August 2011.

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