March 7, 2013 / 6:51 AM / 5 years ago

Superlong JGBs underperform ahead of Friday's 30-year auction

* Ten-year JGB yield up 1 bp, but 10-year futures also up

* Japan to sell 700 bln yen worth of 30-year debt Friday

* Bank of Japan stands pat on monetary policy

By Dominic Lau

TOKYO, March 7 (Reuters) - Japanese government bond prices eased on Thursday, with longer-dated debt underperforming ahead of an auction of 30-year bonds the following day and after data showed robust jobs growth in the U.S. private sector.

But expectations that the Bank of Japan will step up its monetary easing helped support the shorter end of the yield curve. The five-year yield was unchanged at 0.105 percent, not far from its record low of 0.095 percent.

The 10-year yield ticked up 1 basis point to 0.675 percent, after falling to a near 10-year low of 0.585 percent on Tuesday. Ten-year JGB futures, which are more liquid and tend to move opposite to yield, added 6 ticks to 145.12.

The BOJ left monetary policy unchanged on Thursday, as expected, holding fire to wait for new leaders who are expected to usher in aggressive measures to combat deflation.

Asian Development Bank President Haruhiko Kuroda, an advocate of aggressive easing, is expected to be installed as the central bank’s new governor for the next policy meeting on April 3-4.

“The market is preparing itself for tomorrow’s JGB 30-year auction. That’s why the yield curve has steepened further,” said Naomi Muguruma, a senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities.

The 30-year yield rose 2.5 basis points to 1.785 percent as investors made room ahead of Friday’s auction of 700 billion yen ($7.5 billion) in that maturity.

The 20-year yield rose 3.5 basis points to 1.605 percent, after sinking to a near 10-year low of 1.450 percent on Tuesday.

A rise in U.S. Treasury yields overnight after stronger economic data, including private sector job figures, also helped push JGB yields higher.

U.S. private employers added 198,000 jobs to payrolls last month, better than economists’ expectations for an increase of 170,000 and boding well for Friday’s U.S. nonfarm payrolls data.

Shogo Fujita, chief Japan bond strategist at Bank of America Merrill Lynch, said the recent rally in long-dated JGB bonds was a technical correction after a surge in equities forced pension funds to trim their share holdings from exceeding allocation limits, prompting them to buy more bonds. Their buying forced short-covering by other investors, including hedge funds.

But since those passive funds had rebalanced their portfolios, JGB yields have moved higher, he said.

“We have come to the point where the great expectations trade is now at its peak. People need justification and verification for the next leg up,” he said.

Since mid-November, the Nikkei stock average has jumped 38 percent, triggered by the yen’s weakness after Prime Minister Shinzo Abe called for the central bank to adopt bolder action to revive the ailing economy. During that time, yields on benchmark 10-year JGBs have fallen 7.5 basis points.

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