February 28, 2013 / 8:01 AM / 5 years ago

JGB 10-yr yield at lowest since 2003; superlongs outperform

TOKYO, Feb 28 (Reuters) - The benchmark Japanese government bond yield fell for a sixth straight session to its lowest since 2003 on Thursday as the government nominated dovish candidates to head the Bank of Japan, while superlong maturities soared on month-end buying.

The government of Prime Minister Shinzo Abe tapped Asian Development Bank President Haruhiko Kuroda to be BOJ governor after current governor Masaaki Shirakawa steps down on March 19, and nominated academic Kikuo Iwata and BOJ official Hiroshi Nakaso as deputy governors.

JGBs have benefited from expectations that Shirakawa’s successor will implement aggressive monetary easing, but some strategists fear the bond market has priced in too much, too soon.

“It’s all on expectations, with nothing concrete just yet. It’s very difficult to justify this kind of market movement,” said Shogo Fujita, chief Japan bond strategist at Bank of America Merrill Lynch.

Kuroda supports increased purchases of government bonds, and has suggested two years as an appropriate time frame for the BOJ to meet its 2 percent inflation target.

The 10-year yield fell half a basis point to 0.660 percent after trading as low as 0.655 percent, its lowest since June 2003.

Fujita said the benchmark yield could correct by 15 or 20 basis points in the weeks ahead, if market participants become impatient that their high expectations of aggressive action are unlikely to be met immediately.

Ten-year JGB futures ended at 145.02, up 0.03 point, after earlier touching 145.08, their highest since Dec. 10.

Superlong bonds outperformed on month-end demand. Funds often buy longer-term debt at the end of a month to extend the duration of their portfolios.

The 30-year yield shed 4 basis points to 1.810 percent, its lowest since Aug. 7, and the 20-year yield dipped 4 basis points to 1.610 percent, its lowest since Aug. 13.

The five-year yield was flat at 0.115 percent, a record low hit on Tuesday.

The two-year note was untraded, with its yield last at 0.04 percent. The Ministry of Finance offered 2.7 trillion yen ($29.5 billion) of that maturity, which proceeded smoothly as it has in recent months, as the BOJ now buys most of the new issuance in that tenor.

The notes sold at a lowest price of 100.10, and the sale drew bids of 5.14 times the amount offered, sharply down from the previous sale’s bid-to-cover ratio of 10.1 and the lowest since January 2012, but still indicating strong demand. The tail between the average and lowest accepted prices was 0.005, slightly down from 0.008 at last month’s offering.

The bond market had a muted reaction to data released early in the session that showed Japan’s industrial output rose for a second straight month in January, offering some evidence that the export-reliant economy may be emerging from a mild recession due to a pick-up in global demand and the weaker yen. [ID: nL4N0BQ3L2]

The market also shrugged off remarks from BOJ board member Takahide Kiuchi, who said the central bank may need an overhaul of the way it buys assets and review a self-imposed cap on government bond holdings if it were to target longer-dated bonds in the future.

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