Superlong JGBs underperform, 10-Year futures up on BOJ easing bets

TOKYO, Mar 6: Japanese government bond prices fell on Wednesday, giving up some of their steep gains earlier this week, with the superlong sectors underperforming, leading to the yield curve steepening.

    The 20-year yield rose 2 basis points to 1.565 percent after edging close to a 10-year trough of 1.450 percent on Tuesday, while the 30-year yield added 2.5 basis points to 1.755 percent after sinking to a 2-1/2-year low of 1.625 percent the previous day.

    The 10-year yield inched up 1 basis point to 0.670 percent, although 10-year futures, which are more liquid and tend to move opposite to yield, rose 8 ticks to 145.06 as investors kept betting on further aggressive monetary easing from the Bank of Japan.

    ‘The market has been driven by expectations that the BOJ will continue to ease monetary policy and may extend the maturities of the JGBs it buys, particularly after April,’ said Yuya Yamashita, rates strategist at J.P. Morgan.

    The central bank is to conclude a two-day policy meeting on Thursday, the last under Governor Masaaki Shirakawa, who will step down on March 19.

    Haruhiko Kuroda, nominated for BOJ governor, said on Monday during his confirmation hearing that the BOJ should strive to reach its 2 percent inflation target in two years and the most natural way to ramp up stimulus would be to buy longer-date government bonds.

    His comments helped drive JBG yields sharply lower on Monday, with the 30-year yield posting its biggest one-day fall since September 2010.

    Yamashita said he expected the 10-year to trade in the range of 0.600 to 0.700 percent in the near term.

    The underperformance in the superlong sectors led to a steepening of the yield curve on Wednesday, with the spread between 10- and 30-year bonds rising to 108.5 basis points from a 6-1/2-month low of 105.5 basis points hit on Tuesday.

    The shorter-dated five-year yield was unchanged, at 0.110 percent, not far from its record low of 0.095 percent reached on Monday, also helped by the central bank’s easing  expectations.

    ‘When we start to get stronger economic numbers, investors will start positioning for a successful exit from deflation, but until then, it is difficult to find safe ways to fade the BOJ’s bond buying,’ said Neale Vincent, strategist at Nomura Securities.

    ‘One possibility is to use auction timing. With long-end issuance on the increase, it’s probably ok to fade the flattening in the periods between the 10-year and the 20-year auctions.’

    Japan will issue a record 156.6 trillion yen ($1.7 trillion)of JGBs through regular auctions in the fiscal year from next April, including 42.8 trillion yen of bonds to finance spending.

    The ministry will also increase the frequency of 30-year debt auctions to once a month in fiscal 2013/14 from the current schedule of eight times a year to develop the market for super-long bonds.




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