September 26, 2012 / 6:56 AM / 5 years ago

JGB yields hit 3-week lows on mounting growth concerns

* Hope of month-end buying also supports

* Futures could test 9-yr high if break resistance

* JGBs pare some gains briefly after LDP elect tax hike opponent

* Reaction short-lived on other political uncertainties

By Hideyuki Sano

TOKYO, Sept 26 (Reuters) - Japanese government bond prices rose on Wednesday, with the benchmark 10-year yield hitting a three-week low, drawing support from concerns over Europe's debt crisis and a global slowdown though trade was thin ahead of Japanese half-year end.

The market had only a mild, short-lived dent after Japan's main opposition party, which is likely to return to power after a soon-to-be-called election, picked an opponent of a planned tax hike as its next leader.

"In the grand scheme of things, the key for the market is whether the global economy will pick up after stimulus by the Fed and bond buying plan by the European Central Bank, or if we will see a further economic downturn," said Naomi Muguruma, senior strategist at Mitsubishi UFJ Morgan Stanley Securities.

Protests in Spain underscored the country's financing challenges and dulled investors' risk appetite, already dimmed by signs of slowdown in many parts of the world, including China.

The yield on current 10-year cash bonds fell 1.5 basis point to 0.780 percent, its lowest level in three weeks.

While trading in cash bonds was slow due to the Japanese financial half-year end on Sept 30, expectations of month-end buying by pension funds also provided some support.

The 20-year bond yield fell 1.0 basis point to 1.640 percent , near this month's low of 1.635 percent set about three weeks ago while the 30-year yield fell to a two-week low of 1.880 percent and last stood at 1.885 percent.

JGBs gains followed rise in U.S. Treasuries as investors remained unconvinced whether recent stimulus measures by the world's major central banks could lift the moribund global economy.

RETURN TO 9-YEAR HIGH?

On top of global slowdown, strains in Sino-Japanese diplomatic relations are another headache as Japanese carmakers curtail production in China following anti-Japan protests in China.

"The yen, stocks, Spain and output cuts in China. They all support bonds at the moment. I feel the futures are likely to test the high of 144.64," said Tadashi Matsukawa, head of fixed income investments in PineBridge Investments in Tokyo.

Benchmark 10-year JGB futures rose 0.14 point to 144.10 , helped by hedge fund buying.

Though it stopped short of rising beyond the resistance at 144.12, the 61.8 percent retracement of their decline in July and August, A break there could pave the way for a full reversal to its nine-year peak of 144.64 marked in July.

Trade volume was just over 20,000 lots, about three quarters of the daily average so far this year.

JGBs pared some of their gains briefly after the opposition Liberal Democratic Party (LDP) chose former Prime Minister Shinzo Abe as its next leader.

Abe was seen as negative for bonds because he has said he would oppose a tax hike plan in 2014-15 the LDP and Prime Minister Yoshihiko Noda agreed earlier this year.

He is also seen as likely to put more pressure on the BOJ to take more radical approach to aim for higher inflation, which investors think could hurt long-dated bonds.

The market's reaction was short-lived not least because it remains to be seen when the general election will be held and whether the LDP can win enough seats to form a government without the help of other parties.

Still, with Abe at the helm of the LDP, investors could become more cautious about JGBs especially when they come to know the timing of next election.

Ruling and opposition lawmakers have said Noda is likely to call an election for November.

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