July 11, 2017 / 6:37 AM / a month ago

Japanese government bonds selloff steadies after solid 5-yr auction

TOKYO, July 11 (Reuters) - Japanese government bond prices found a firm footing on Tuesday, with the selloff seen in recent weeks stabilising following strong investor support in a closely-watched auction of five-year JGBs.

The market has been also underpinned by the Bank of Japan's aggressive bond purchase operations on Friday, which has also assured market players of its firm commitment to keep yields around the current levels.

The auction of 2.2 trillion yen ($19.2 billion) five-year JGBs produced the highest accepted yield of minus 0.033 percent.

The bid-to-cover ratio was 4.85, above 4.71 in the previous five-year JGB auction last month and the highest in almost three years.

In the secondary market, the five-year yield stood flat at minus 0.035 percent.

"Given today's strong auction results, the BOJ probably won't need to increase its buying in five-year bonds tomorrow," said a trader at a Japanese bank.

The BOJ is due to buy one- to ten-year JGBs on Wednesday.

Still, traders say the BOJ may have to step in and increase its buying or conduct fixed-rate purchases to draw a line in the sand again in the near future.

Such a challenge could come as early as Thursday if U.S. Federal Reserve Chair Janet Yellen makes hawkish comments in her testimony on Wednesday and boosts U.S. and European bond yields, they say.

The JGB market had been hit by rising expectations that some of the world's central banks including the European Central Bank may dial back their stimulus.

Although the BOJ is nowhere near ending its easy policy, higher bond yields elsewhere undermine the relative attraction of JGBs.

Pressure from rising bond yields overseas is likely to hurt longest maturities the most and to steepen the yield curve, because the BOJ's control on them is looser than that on the 10-year bonds and shorter maturities.

In part driven by such thinking, the curve steepened on Tuesday as the 30-year yield rose 1.0 basis point to 0.900 percent while the 10-year JGB yield rose 0.5 basis point to 0.095 percent.

The 10-year JGB futures price was up 0.01 point at 149.78 .

$1 = 114.41 yen Reporting by Tokyo Markets Team; Editing by Sam Holmes

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