TOKYO, Aug 29: Japanese government bond prices firmed on Wednesday, with recently lagging longer maturities getting a lift from month-end purchases.
Duration extension at the end of a month frequently helps the yield curve flatten as insurers and pension funds buy longer-dated debt to extend the duration of their portfolios.
Longer maturities had cheapened significantly in recent sessions, with the spread between the 10-year and 30-year yields rising to 1.095 on Wednesday morning, its widest since mid-October 2010.
‘I think the yield curve steepened very much for the past few days and a lot of the steepening trade might be being taken off at this moment,’ said Tadashi Matsukawa, head of Japan fixed income at Pinebridge Investments.
‘Month-end fixed-income buying might be kicking in a little bit,’ he said, adding that some banks might also be buying 20-year bonds.
The yield on 30-year debt fell 1 basis point to 1.885 percent, down from a two-month high of 1.895 percent hit the previous day, while the 20-year JGB yield also shed 1 basis point to 1.655 percent.
The 10-year yield slipped half a basis point to 0.800 percent, though was still well off a nine-year low of 0.720 percent hit last month. Benchmark yields reached a two-month high of 0.860 percent in mid-August.
The benchmark 10-year JGB futures contract closed up 0.10 point at 143.93, moving further away from Aug. 16’s 2-1/2-month low of 143.27.
Futures continued to hold well above technical support at their 14-day moving average at 143.72. Volume was extremely light at 16,567 contracts, falling short of the previous session’s 21,414 contracts and last week’s average of 29,250 contracts.
‘Trading is at a near-standstill this week ahead of Jackson Hole,’ said a fixed-income fund manager at a Japanese trust bank.
U.S. Federal Reserve Chairman Ben Bernanke will speak on Friday at an annual event in Jackson Hole, Wyoming. Investors will parse his words for signals on the bank’s policy intentions, after recent U.S. Data painted a mixed economic picture.
Homes prices rose for a fifth month in a row in June, according to the Standard & Poor’s/Case-Shiller report, but shopper confidence fell to its lowest in nine months in August.
Bernanke’s counterpart at the European Central Bank, Mario Draghi, had been scheduled to speak at the event on Saturday, but has opted out, citing a heavy workload.
JGB demand was limited by a modest recovery in equities, with the Nikkei stock average rising 0.4 percent, as well as by the thin market conditions. But Japanese government debt got support from Tuesday’s gains in U.S. Treasuries prices.
Expectations of a third round of quantitative easing, or QE3, pushed benchmark Treasury yields to three-week lows on Tuesday, though they gave up some of those gains in Asia on Wednesday.
Yields on the 2-year JGB edged up half a basis point ahead of a Thursday’s sale. The Ministry of Finance will offer 2.7 trillion yen of 2-year notes in an auction which is expected to proceed smoothly as the Bank of Japan now purchases much of the new issuance in that tenor.
For the past eight two-year sales, the coupon was set at 0.1 percent, matching the interest the central bank pays on its current account excess reserves.
(agencies)
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