July 26, 2013 / 6:36 AM / 4 years ago

Benchmark JGB yields inch down as BOJ operations support

* JGBs shrug off rise in core consumer prices
    * Yield curve flattens as superlong zone outperforms
    * Stock selloff has limited impact on JGB demand

    By Lisa Twaronite
    TOKYO, July 26 (Reuters) - Japanese government bonds ended
the week on a high note Friday, with the benchmark yield inching
back toward a two-month low hit this week as investors shrugged
off data showing consumer prices marked their fastest rate of
increase in nearly five years. 
    Bank of Japan operations also underpinned the cash bond
market, particularly at the longer end of the yield curve.
    In its regular asset-purchase operations, the BOJ offered to
buy outright 200 billion yen ($2.01 billion) of JGBs with
residual maturity of one year to three years, 300 billion yen of
JGBs with three to five years left to maturity, and another 200
billion yen with more than 10 years remaining.   
    "Lately, institutions buy JGBs at auctions, and then sell
them to the BOJ in operations, and these are the flows. There
aren't many other factors that can influence this," said
Tomohiro Miyasaka, fixed income analyst at Credit Suisse in
    The 10-year yield edged down half a basis
point to 0.790 percent, moving toward 0.770 percent touched
twice this week, which was its lowest since May 14.    
    The 10-year JGB futures contract finished 0.10
point higher at 143.63, after ending the morning session nearly
flat, and moving back toward a two-month intraday high of 143.85
touched on Tuesday. 
    Volume of 18,410 contracts was relatively light, and fell
below the previous session's 23,218 contracts.
    While recent movements of Japanese stocks and JGBs don't
always correlate as the BOJ's massive asset-buying supports the
bond, a sharp selloff in equities on Friday might have added
some extra appeal to fixed-income assets. The Nikkei stock
average skidded 3 percent.  
    "Stocks are weak today, and while this has no direct effect
on the JGB market lately, some investors such as Japanese banks
have certainly been big sellers of JGBs in recent weeks, so some
probably thought this was as good a time as any to buy back some
positions," said a fixed-income fund manager at a Japanese trust
bank in Tokyo.
    Japan's three major banking groups slashed their JGB
holdings by 20 percent to a combined 90 trillion yen or so in
the April-June quarter, the Nikkei business daily reported on
    JGBs gained in the face of data showing a rise in Japan's
consumer prices, which was in line with both economists' and
market participants' expectations.
    Core consumer prices turned positive and rose 0.4 percent in
June from a year earlier, matching the median estimate of
economists polled by Reuters.   
    "CPI was stronger than most people had expected, but looking
at the breakdowns, it's mostly due to higher energy prices on
the back of the yen weakness," said Naomi Muguruma, senior
fixed-income strategist at Mitsubishi UFJ Morgan Stanley
    "So I think there was little surprise in terms of the
factors that pushed up the CPI, and also market participants had
expected the CPI would turn to positive," she said, adding that
she expects the benchmark 10-year JGB yield to trade in a narrow
range centered around 0.80 percent in the coming sessions.
    Japanese Finance Minister Taro Aso said on Friday in a
regular press conference after a cabinet meeting that the speedy
CPI rise showed that Japan was gradually shifting to inflation
from deflation. 
    Japanese Economics Minister Akira Amari said domestic prices
were gradually rising towards the government and central bank's
two percent inflation target. 
    Still, some BOJ policymakers are becoming more vocal in
expressing concerns about the economic outlook, which could
undermine what has been a unified public position of optimism
key to the central bank's reflationary message. 
    The yield curve flattened as the superlong sector
outperformed, with the 20-year yield dropping 2.5
basis points to 1.705 percent, and the 30-year yield
 shedding 3.5 basis points to 1.825 percent. 
    The spread between 10-year and 20-year yields, which had
widened to a four-month high of 94.5 basis points on Wednesday
on a last-traded basis, shrank to 91.5 basis points.
    The spread between the yields on 10-year and 30-year debt
contracted to 103.5 basis points from a four-month high of 108
basis points hit on Wednesday.
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