February 4, 2015 / 7:46 AM / 5 years ago

Longterm JGB rout continues ahead of 30-year sale

TOKYO, Feb 4 (Reuters) - Japanese government bonds continued to fall on Wednesday, with the benchmark yield rising to a near eight-week high, and the superlong zone selling off a day after a 10-year note sale met surprisingly weak demand.

The 10-year JGB yield added 2.5 basis points to 0.380 percent after earlier rising as high as 0.395 percent, its highest level since Dec. 12.

“With liquidity so low and volatility so high, it’s very hard for real-money investors to make moves until the market settles down,” said a fixed-income fund manager at a European asset management firm in Tokyo.

The superlong zone in particular sold off ahead of Thursday’s monthly sale of 600 billion yen of 30-year JGBs, with the 30-year yield adding 7.5 basis points to 1.415 percent. It earlier rose as high as 1.425 percent, its highest since Nov. 19.

“We’re hoping tomorrow’s 30-year auction isn’t a repeat of yesterday’s 10-year sale, but if demand is weak, then volatility could continue for a while,” the fund manager said.

Analysts at Morgan Stanley MUFG Research predicted that a tail of around 0.20 looked likely, given that volatility is so high.

Other strategists and market participants said it could go even higher. The tail is the gap between the lowest and average prices at the auction, and a higher tail suggests weaker demand.

Bank of Japan operations provided some support to the market. The BOJ offered to buy 400 billion yen ($3.40 billion) of JGBs in the 5-year to 10-year zone, 400 billion yen in the 3-year to 5-year zone, and 400 billion yen in the 1-year to 3-year zone under its asset purchase programme, through which it has committed to increase its holding of JGBs by around 80 trillion yen a year.

Japan Governor Haruhiko Kuroda said in parliament on Wednesday that the central bank’s qualitative and quantitative easing policy is not having a negative impact on Japan’s bond market, and that there was no problem with liquidity.

“We expect the 20s/30s curve to keep steepening in the longer term unless the BOJ alters its purchase amounts,” the Morgan Stanley MUFG Research analysts added.

The 20-year yield added 7 basis points to 1.155 percent after rising as high as 1.65 percent, its highest since Dec. 9.

The 10-year futures contract closed down 0.08 point at 147.30. ($1 = 117.5600 yen) (Reporting by Tokyo Markets team; Editing by Eric Meijer)

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