November 12, 2012 / 6:30 AM / in 5 years

JGBs supported, 10-year yield within sight of 9-year low

* Uncertainty over U.S. fiscal cliff seen supporting JGBs

* 10-yr JGB yield seen dipping below 9-yr low of 0.72 pct

* Japan GDP data adds to evidence Japan is in for recession

* Possibility of election could undermine longer maturities

By Hideyuki Sano

TOKYO, Nov 12 (Reuters) - Japanese government bond prices held firm on Monday, with the benchmark yield within sight of a nine-year low hit in July, on concern about the U.S. political deadlock over the “fiscal cliff” that could push the United States into recession.

With the Japanese economy also looking increasingly likely to slip into recession, the 10-year JGB yield is expected to dip below its July low of 0.720 percent in the coming weeks, analysts said.

Ten-year JGB futures ticked up 0.02 point to 144.58 , a whisker away from their day-session peak hit in July of 144.64, which was their second-highest after the record 145.09 set in 2003.

The yield on the current 10-year cash bonds was flat at 0.730 percent, matching last week’s low and near a nine-year low of 0.720 percent hit in July.

“It is hard to expect a clear-cut solution to the fiscal cliff and long-term bond yields will likely stay under pressure. The 10-year yield will get closer to 0.7 percent,” said Naomi Muguruma, a senior strategist at Mitsubishi-UFJ Morgan Stanley Securities.

After elections last week left the balance of power in Washington largely unchanged - the White House and the Senate under Democrat control and the House of the Representatives controlled by the Republicans - investors are focusing on whether U.S. policymakers can take measures to ease automatic spending cuts and expiring tax cuts due next year.

Worth about $600 billion in total, this sharp fiscal tightening, unless modified, is threatening to push the U.S. economy into recession, the last thing Japan needs as its own economy is quickly losing momentum.

Data on Monday showed Japan’s economy shrank 0.9 percent in the third quarter, in line with forecasts and cementing fear that the economy is heading for a recession as many analysts expect it to shrink again in October-December.

The 20-year bond yield ticked down 0.5 basis point to 1.645 percent, while the 30-year yield was flat at 1.910 percent.

While JGBs are seen generally supported by weak economic conditions, one wild card for the market is the likelihood of Prime Minister Yoshihiko Noda calling a general election, analysts said.

“At the moment, the market is not pricing in the chance of a likely change in the government as the schedule of the election is not fixed yet,” said Hidenori Suezawa, chief strategist at SMBC Nikko Securities.

“But I expect Noda to hold an election by the end of year,” he added.

Opinion polls have shown the conservative opposition Liberal Democratic Party, which some market players worry is less committed to fiscal belt-tightening such as planned tax hikes, is expected to beat Noda’s Democratic Party of Japan.

“Investors will hesitate to buy super-long bonds if (LDP leader Shinzo) Abe takes power,” said Tohru Yamamoto, chief bond strategist at Daiwa Securities.

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