September 13, 2012 / 3:16 AM / 5 years ago

JGBs fall ahead of 20-yr sale; Fed meeting eyed

TOKYO, Sept 13 (Reuters) - Japanese government bond prices fell on Thursday, taking their cue from U.S. Treasuries after a German court ruling raised hopes of progress on Europe’s debt crisis, with the yield curve steepening as longer maturities dropped ahead of a 20-year sale.

* JGBs were underpinned by rising expectations that the U.S. Federal Reserve would announce a third round of bond purchases, known as quantitative easing (QE), at the end of its two-day meeting on Thursday.

A Reuters poll showed economists raised their bets on QE3 to 65 percent from 60 percent in August.

But any further stimulus steps would likely increase investor risk appetite and lift stocks, keeping demand for fixed income assets in check, market participants said.

* Germany’s Constitutional Court gave the green light for the country to ratify Europe’s new bailout fund, boosting hopes that the single currency bloc is finally putting in place the tools to resolve its three-year old debt crisis.

* “The market mood has changed. An overnight selloff in Treasuries after the German ruling is weighing on bonds here,” said a fixed-income fund manager at a Japanese trust bank.

* On the supply side, the Ministry of Finance offered 1.2 trillion yen in 20-year bonds with a coupon of 1.7 percent, higher than the previous sale’s 1.6 percent. The higher coupon could support demand, although some strategists cautioned that potential buyers might hold off.

* “We estimate that buying is likely to come in post-auction, rather than at the auction itself,” strategists at Bank of America Merrill Lynch wrote in a note to clients.

“The end to the first half of the financial year is approaching, and it is hard imagine that the banks will be active buyers of 20-year JGBs, while the fact dealers’ positions are on the heavy side is also a concern.”

* The yield curve steepened as the superlong sector sold off ahead of the sale, with the 20-year bond yield adding 2.5 basis points to 1.675 percent. The 30-year yield also rose 2.5 basis points to 1.900 percent.

* The 10-year JGB futures contract for December ended morning trade down 0.22 point at 143.58, while the yield on the 10-year cash bond rose 2 basis points to 0.825 percent, edging close to last month’s high of 0.860 percent.

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