JGBs fall, long bonds undermined by political cloud

TOKYO: Japanese government bonds fell on Tuesday, with the yield curve bear-steepened as longer-dated maturities were weighed down by selling by players needing to make room in their portfolios ahead of a 20-year JGB auction, and from rising wariness over the ruling party's leadership race.

"Yield rises in superlongs are quite straightforward today ... coming from position adjustments ahead of the 20-year bond sale and caution over who will be Prime Minister Kan's successor," a trader at a Japanese brokerage said.

"People are afraid that Japan's fiscal discipline may not be maintained with (former foreign minister Seiji) Maehara running," he added.

JGBs with maturities over 10 years underperformed as the 10-year yield climbed 2.5 basis points to 1.010 percent, moving away from a nine-month low of 0.970 percent hit on Friday.

Prime Minister Naoto Kan said in parliament he told his cabinet on Tuesday he will announce his resignation on Friday if pending bills are passed by then, setting the stage for parliament to pick Japan's sixth leader in five years as the country confronts a nuclear crisis and a raft of economic woes.

The race to succeed Kan was blown wide open on Monday when Maehara, 49, decided to throw his hat in the ring, dimming chances that fiscally conservative Finance Minister Yoshihiko Noda could win.

Political paralysis is threatening to further undermine Japan's sovereign credit rating. Standard & Poor's has already put Japan on an AA-minus rating with a negative outlook. And Japanese credit agency R&I said on Monday it looked increasingly hard for Japan to keep its highest AAA rating.

The 20-year yield rose 2.5 basis points to 1.820 percent, shifting to the upper end from the middle of the 1.7-1.85 percent range this month.

The yield of the 30-year bond also jumped 3 basis points to 1.975 percent.

In contrast, the two-year yield was flat at 0.125 percent, staying at a 10-month low marked on Monday, supported by expectations for additional monetary easing by the Bank of Japan.

The spread of the five- and 20-year yields expanded to 151.5 basis points, the widest since early June.

Market players expect the Bank of Japan to take easing steps by either expanding its 50 trillion yen ($651 billion) pool of funds to buy government and private assets, extending the duration of its JGB purchases, or cutting rates further.

But many said there was limited room for yields to fall from current levels.

"As expectations for additional monetary easing have increased, the short- and medium-dated sectors have drawn demand, but now yields are really getting close to their lower end with very limited room for more falls, so people may want to take profits for now," says a trader at a US brokerage.

"With uncertainty in domestic politics and this week's upcoming 20-year JGB auction, superlongs may be weighed down a bit more, but it's unlikely that the yield curve will bull-steepen from its current level, even based on a scenario of additional monetary easing," he said.

Market players said some investors, possibly including a big Japanese bank, had recently shifted funds out of 20-year bonds to short- and medium-term maturities such as the five-year sector, but that trend had eased for now.

And there is unlikely to soon be any drastic change in recent momentum as markets are bracing for a crucial speech by Federal Reserve Chairman Ben Bernanke at the end of the week.

September 10-year JGB futures closed at a session low of 142.55, down 0.22 point and moving away from a nine-month high of 142.90 hit on Friday.

Futures mostly kept their bullish momentum on charts but sank below their five-day moving average at 142.60 on Tuesday, breaching support for the first time in five days.

US Treasury prices eased in Asia on Tuesday as firm US share prices and Asian stocks prompted light selling ahead of a two-year note auction later in the day.

Copyright Reuters, 2011