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JGBs mostly steady; superlong zone weakens after BOJ operations
May 9, 2013 / 7:01 AM / 5 years ago

JGBs mostly steady; superlong zone weakens after BOJ operations

* Yield curve steepens as 30-yr yield rises to highest since March 21

* 10-yr futures end flat on lowest volume of 2013

By Lisa Twaronite

TOKYO, May 9 (Reuters) - Japanese government bonds were mostly steady on Thursday, with the medium-term zone supported by the Bank of Japan’s asset-buying operations, though superlong maturities underperformed.

The BOJ offered to buy 600 billion yen ($6.07 billion) in JGBs outright with residual maturities of more than 5 years and up to 10 years, and another 600 billion yen maturing in more than one year and up to 5 years. It did not buy any superlong maturities of 20 years or above.

The 10-year Japanese government bond yield was flat at 0.590 percent after earlier slipping to 0.585 percent and rising to 0.595 percent, remaining solidly wedged in its recent one percentage point range.

The benchmark yield has clung to a narrow trading band of 0.55 to 0.65 percent since late last month, after initially gyrating in the wake of the BOJ’s massive stimulus scheme unveiled on April 4 under which it will double its bond holdings in two years to help it meet the goal of 2 percent inflation.

“The market is beginning to understand that it shouldn’t second-guess the power of the central bank,” said Shogo Fujita, chief Japan bond strategist at Bank of America Merrill Lynch.

“I can’t foresee yields heading higher, in an environment where the central bank is going to buy so much of the gross issuance,” he said.

The 10-year JGB futures contract ended flat at 144.72, after spending the session wedged in a narrow range between 144.70 and 144.84. Volume was the lowest so far with this year, with 14,604 contracts trading.

“Lately, volatility has dropped, and it’s hard to see bonds making big moves, at least ahead of this summer’s election,” said a fixed-income fund manager at a European asset management firm in Tokyo.

Prime Minister Shinzo Abe’s approval rating remains high, and his Liberal Democratic Party and smaller coalition parties have a chance at winning a two-thirds majority in July’s upper house election. They already hold two-thirds of the lower house.

The lack of JGB supply and low yields will slow the pace at which Japanese insurers raise their exposure to long-term JGBs to cut the duration gap between assets and liabilities, Fitch said in a report released on Thursday.

Fitch estimated this gap to be approximately five years, and said the sensitivity to interest rates which the gap produces makes this a major risk.

The yield curve steepened on Thursday as the superlong zone, left out of the BOJ operations, underperformed.

The 20-year bond yield added 1 basis point to 1.510 percent after rising as high as 1.515 percent, its highest since April 17. The 30-year bond yield added 2.5 basis points to 1.660 percent, its highest since March 21.

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