December 26, 2012 / 6:46 AM / in 5 years

JGBs fall, with 10-year yield hitting 2-month high

* Ten-year JGB futures hit 3-month low

* JGB 30-year yield adds 2 bps, 20-year up 3 bps

By Dominic Lau

TOKYO, Dec 26 (Reuters) - Japanese government debt fell on Wednesday, with the 10-year yield hitting a two-month high, on expectations that incoming Prime Minister Shinzo Abe would increase pressure on the central bank to ease policy further.

The 10-year yield added 2 basis points to 0.785 percent to its highest level since Nov. 1, while JGB 10-year futures fell 26 ticks to 143.66 in active trade after trading as low as 143.58, their lowest level since Sept. 19.

“Mr Abe and the Liberal Democratic Party look like they want the dollar/yen to be at least above 85, or possibly 90. They want the yen to be weaker than the current level,” said Tadashi Matsukawa, head of Japan fixed income at PineBridge Investments.

“We continue to see equities going high, so the pressure is on the long-end of the JGB curve. For the short-end of the curve, we continue to see the BOJ ease aggressively, so there is no change in that.”

BOJ policymakers debated their various options, such as an open-ended commitment to buy assets, as early as in November, minutes from the central bank’s rate review showed, a sign that they were already leaning toward action back than on the worsening economic outlook.

Yields on the 30-year bonds added 2 basis points to 1.955 percent, while those on the 20-year debt rose 3 basis points to 1.745 percent.

Japan’s Nikkei share average surged 1.5 percent to 10,230.36 on Wednesday, edging close its year’s high of 10,255.15, while the yen fell to a 20-month low against the dollar at 85.38 yen. The Nikkei has rallied 18.1 percent over the past six weeks, spurred by the yen weakness.

Matsukawa said he expected the 10-year yield to reach 0.80 percent in early 2013 and to trade between 0.90 and 1.0 percent in the middle of next year.

A fixed-income fund manager at a Japanese asset management firm in Tokyo said Japanese investors’ demand would help cap any rise in 10-year yield at around 0.80 to 0.85 percent.

“The 10-year sector will be supported by a lot of domestic buyers. They have lots of money and they have to invest in something. The 10-year at 0.8 percent is a good level for them,” the fund manager said.

Benchmark JGBs have lost 5.7 percent in 2012 in dollar-based terms, according to Reuters data.

Yields on 2-year bonds were unquoted after the Ministry of Finance sold 2.7 trillion yen ($31.8 billion) worth of two-year debt.

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