December 20, 2012 / 7:16 AM / 5 years ago

JGBs pare gains after BOJ eases policy as expected

* BOJ expands APP by Y10 trln, facing political pressure

* Life insurers said buying in superlong sector

By Lisa Twaronite

TOKYO, Dec 20 (Reuters) - Japanese government bonds pared gains on Thursday after the Bank of Japan took further easing steps as expected, although benchmark yields stayed well off a nearly 7-week high hit in the previous session.

The BOJ expanded its asset-buying and lending programme (APP) by 10 trillion yen ($119 billion) to 101 trillion yen, a widely anticipated move to ease monetary policy in response to intense political pressure.

“Expectations for the BOJ’s expansion of the APP were divided, with some expecting it to happen either this month or next, and many were more inclined to believe it would happen in January, so it’s not a surprise, but they did it this time, not next time,” said Maki Shimizu, senior strategist at Citigroup Global Markets Japan.

“At least it gives a message to the market that the BOJ is willing to do something more,” she said.

The central bank faces intensifying pressure from Shinzo Abe, the country’s next leader, to boost efforts to beat deflation. Abe said on Thursday that the BOJ is carrying out the policy steps sought by his Liberal Democratic Party (LDP) one at a time.

Yields on cash 10-year JGBs fell 1 basis point to 0.770 percent, above the session low of 0.755 percent but still shy of Wednesday’s high of 0.780 percent, which was their highest level since Nov. 2.

The 10-year JGB futures contract snapped a five-session losing streak, adding 0.13 point to end at 144.01, although below its morning close of 144.08. On Wednesday, futures hit an intraday low of 143.70, their lowest since Sept. 20.

Discussion at Thursday’s BOJ meeting of cutting interest paid on excess reserves parked at the central bank by financial firms to zero from the current 0.1 percent was one factor supporting prices of shorter maturities, Citigroup’s Shimizu said.

Yields on 2-year notes were flat at 0.90 percent while those on 5-year debt gave up half a basis point to 0.180 percent.

The recently battered superlong sector outperformed on Thursday, with life insurers said to be buying, though flows were said to be light. Long maturities suffered in recent weeks amid concern that Abe’s reflationary policies could lead to inflation in the long term.

Yields on 20-year bonds fell 1 basis point to 1.735 percent, up from 1.720 earlier. On Wednesday, they rose as high as 1.750 percent in the previous session, their highest since early April.

Yields on 30-year bonds lost 2 basis points to 1.970 percent, up from a low of 1.955 percent before the BOJ’s announcement.

“Life insurers are said to continue to be buying at these levels, on the chance that the U.S. fiscal cliff talks drag on longer and keep Treasury yields and those on JGBs from rising much this year,” said a fixed-income fund manager at a Japanese asset management firm in Tokyo.

The budget stalemate in Washington will shift for the first time to the floor of the U.S. House of Representatives on Thursday.

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