JGBs dip but losses limited as yen stays near peak

Trade the News

Thursday September 09, 2010 11:46:03 PM GMT

* 10-yr/30-yr yield spread widens in wake of 30-yr auction

* Trend of yen strength seen supporting JGBs

* Five-year JGB yield may have limited room to fall -analyst

By Masayuki Kitano

TOKYO, Sept 9 (Reuters) - Long-end Japanese government bonds fell on Thursday but their losses were limited as the yen stayed near a 15-year peak against the dollar and worries simmered about the outlook for Tokyo shares and the economy.

The yield curve steepened in the wake of the previous day's lacklustre auction of 30-year bonds, pushing the 10-year/30-year yield spread up to the highest in about four months, at 89 basis points..

"It is hard for the market to try for a rebound because longer-end bonds are not firm," said Makoto Yamashita, chief Japan interest rate strategist at Deutsche Securities.

"But at the same time we are not in the type of environment where people would want to aggressively test the downside," he said, adding that the recent trend of yen strength and equities weakness still seemed intact.

The benchmark 10-year JGB yield rose 1.5 basis point to 1.140 percent.

The 10-year yield has rebounded since hitting a seven-year low of 0.895 percent in late August, and touched a 2-½ month high of 1.195 percent earlier this week.

JGBs have tumbled over the past two weeks as domestic banks, which had been massive buyers of superlong bonds, began selling to book profits before Japan's fiscal first half-year ends on Sept. 30.

REGAINING STABILITY

The market has regained some stability this week as a flurry of long liquidation ebbed and some investors began wading back into JGBs, traders said.

The December 10-year JGB futures contract effectively took over the benchmark mantle as its trading volume exceeded September futures.

December 10-year JGB futures dipped 0.11 point to 141.51.

The dollar stood at 83.78 yen, not far from a 15-year low of 83.34 yen hit on trading platform EBS on Wednesday.

A rise in the yen could exacerbate deflationary pressures and stir market speculation about the possibility of further monetary easing measures by the Bank of Japan.

The BOJ stood pat on monetary policy on Tuesday but vowed timely action when needed.

The yen's rise and the possibility of further BOJ monetary easing are seen as supportive factors for medium-term JGBs.

The five-year JGB yield may have limited room to fall from current levels, however, said Akitsugu Bandou, senior economist for Okasan Securities, since the five-year yield has already dipped below three-month euroyen TIBOR.

Japanese banks set their lending rates to businesses based on TIBOR, so when JGB yields drop below those levels, JGB investment may become less attractive for banks, Bandou said.

The five-year JGB yield stood at 0.305 percent late on Wednesday, slightly below three-month euroyen TIBOR, which was near 0.36 percent on Thursday. (Editing by Edmund Klamann)

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