July 24, 2018 / 6:22 AM / in 3 months

UPDATE 1-Japanese government bonds erase earlier gains as BOJ concerns return

(Updates throughout)

By Shinichi Saoshiro

TOKYO, July 24 (Reuters) - Japanese government bond prices reversed earlier gains on Tuesday, with investors unable to shake concerns the central bank might be a step closer to unwinding its aggressive monetary stimulus.

Losses were most pronounced among super long-dated bonds, with the 40-year JGB auction initially attracting ample demand but later sliding amid the worries about Bank of Japan policy.

The 40-year yield was up 1.5 basis points at 0.925 percent after going as high as 0.930 percent, its highest since Feb. 15.

The yield had earlier on Tuesday dipped to 0.900 percent before making a U-turn.

“The market has not been able to shake off uncertainty regarding BOJ policy, and some cautious dealers have sold longer dated JGBs after the auction to lighten their positions,” said a trader at a domestic brokerage.

The 30-year JGB yield was 1.5 basis points higher at 0.790 percent after brushing a five-month peak of 0.795 percent.

On Monday, the 30-year yield had jumped about 8 basis points after Reuters and other media reported that the BOJ was holding preliminary discussions on possible changes to its monetary policy.

The benchmark 10-year yield was flat at 0.080 percent .

The rise by the yield has slowed after the BOJ’s offer on Monday to buy an unlimited amount of five- to 10-year JGBs in a special operation helped halt the yield surge.

The JGB market was expected to remain nervous until the central bank’s two-day board meeting which begins on July 30.

According to the recent media reports, possible policy changes on the agenda include adjustments to interest-rate targets to make the BOJ’s massive stimulus programme more sustainable.

The BOJ has been buying JGBs as part of its yield curve controlling scheme, but concerns have grown that the central bank could eventually run out of bonds to purchase if it keeps absorbing huge amounts of debt.

Tuesday’s 400 billion yen ($3.59 billion) 40-year JGB auction attracted sufficient demand, with the previous day’s market slide seen as lowering the new bonds’ prices to attractive levels.

At the 40-year auction, the bid-to-cover ratio - a gauge of demand - slipped to 3.30 from 3.92 at the previous one in May, but it was above 3.20, the average from the past 10 sales.

$1 = 111.3000 yen Additional reporting by the Tokyo markets team; Editing by Richard Borsuk and Sam Holmes

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