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Benchmark JGBs firm, shrugging off tepid 10-year CPI-linked sale
February 7, 2017 / 6:39 AM / 10 months ago

Benchmark JGBs firm, shrugging off tepid 10-year CPI-linked sale

* Investors ponder BOJ’s ‘yield curve control’ policy

* Superlong yields steady ahead of this week’s 30-year sale

TOKYO, Feb 7 (Reuters) - Benchmark Japanese government bonds edged higher on Tuesday, shrugging off tepid demand at an auction of inflation-linked 10-year bonds, as investors continued to puzzle over the Bank of Japan’s stance on JGB purchases.

The 10-year JGB yield was down half a basis point (bp) at 0.095 percent, well below a one-year high of 0.150 percent notched on Friday, while 10-year JGB futures finished up 0.11 point at 149.66.

Under its current monetary policy framework of “yield curve control” introduced in September, the BOJ aims to guide the 10-year JGB yield to around zero percent.

“For now, shorter maturities, 2- to 5-year JGBs, still have negative yields, while superlong yields have risen, so the BOJ’s ‘yield curve control’ policy has indeed steepened the curve,” said Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank in Tokyo.

“But it’s been less than a half year since the BOJ started this policy, so we need to wait to see what they do from now,” she said. “In the meantime, there is an uncertain mood in the market with investors’ opinions divided on what the BOJ will do next.”

The central bank has so far apparently refrained from any steps to stem rising yields in the superlong zone, with maturities of 20 years or longer, even as they have gained 30-50 basis points since the BOJ embarked on its latest policy.

On Tuesday, the 20-year yield and the 30-year JGB yield were both flat at 0.715 percent and 0.900 percent respectively, ahead of a 30-year auction on Thursday.

“I wish they would stop ‘yield curve control’ and just let JGB yields move naturally, or as naturally as they can move when the central bank is buying such a large quantity of JGBs,” said a fixed-income fund manager at a European asset management firm in Tokyo.

On Monday, the central bank bought 450 billion yen ($4 billion) of bonds with maturity of more than five to 10 years, following two separate purchases of 10-year JGBs on Friday, underscoring the central bank’s commitment to keeping the benchmark yield in its desired zone.

But on Jan. 25, the BOJ surprised markets by refraining from purchasing short-term bonds, which led many investors to speculate that the central bank might be opting to gradually trim its JGB purchases.

“BOJ is not helping matters by sending mixed messages,” said Neale Vincent, strategist at Nomura Securities in Tokyo.

JGB yields briefly crept off session lows on Tuesday after lacklustre demand at the Ministry of Finance’s sale of 400 billion yen of 10-year JGBs with a 0.1 percent coupon linked to the consumer price index produced a the lowest price of 105.10, with 25.7142 percent of the bids accepted at that price.

The sale drew bids of 2.61 times the amount offered, down from the previous sale’s bid-to-cover ratio of 3.21 times, indicating less demand for the bonds.

Earlier in the session, JGBs took their cue from firmer U.S. Treasuries. Japanese government debt often tracks its U.S. counterparts, whose yields fell overnight on investors’ concern that U.S. President Donald Trump’s promised pro-growth policies have take a back seat to his immigration curbs and protectionist stances.

Trump will welcome Japanese Prime Minister Shinzo Abe on a U.S. visit later this week. Market participants await any remarks on Japan’s fiscal or monetary policy that might emerge from their meeting, though trade and defense issues will likely take centre stage.

Bond investor Bill Gross said on Monday that without quantitative easing from the European Central Bank and the BOJ, which he says keeps eurozone and Japanese yields artificially low, the 10-year U.S. Treasury yield would “rather quickly” rise to 3.5 percent and the U.S. economy would sink into recession.

Reporting by Tokyo markets team; Editing by Simon Cameron-Moore

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