JGB 10-yr yield hits 7-yr low after Bernanke, auction

* JGBs buoyed as Fed’s Bernanke fuels low rate prospects

* Solid 20-yr auction outcome gives market further boost

* Sale seen reflecting widening investor base in superlongs

* Futures hit 7-yr high, yield curve bull flattens

By Shinichi Saoshiro

TOKYO, July 22 (BestGrowthStock) – Japanese government bonds rallied
on Friday, with the benchmark 10-year yield hitting its lowest
in seven years, after testimony by Fed Chairman Ben Bernanke
suggested low interest rates would remain in place for a long
time.

Bonds were given a further boost after a sale of 20-year
debt attracted strong demand.

The 10-year yield (JP10YTN=JBTC: ) dropped 3 basis points to
1.055 percent after brushing 1.045 percent, its lowest since
August 2003.

September 10-year futures (2JGBv1: ) climbed 0.17 point to
141.87 after hitting 142.08, their highest in seven years.

“Bernanke’s testimony represented a new chapter for the bond
market, as it suggested the Fed is bracing for tougher economic
conditions than it anticipated,” said a fund manager at a
domestic investment firm.

“Any resulting easing by the Fed would come at a time when
central banks in Europe and Japan are strengthening their easing
rhetoric. This will add to flattening pressure on the yield
curve, possibly taking the (JGB) 10-year yield below 1 percent.”

Bernanke, delivering the Fed’s semiannual report to Congress
on monetary policy on Wednesday, said the economy faced
“unusually uncertain” prospects and the Fed was ready to take
further steps to bolster growth if needed, but also that policy
makers believed the economy was still on a path to recovery.
[ID:nWALLIE6DU]

The Fed chairman’s testimony helped boost demand for the 1.1
trillion yen ($12.6 billion) of 20-year JGBs sold on Thursday,
market players said.

The usual rules of engagement were reversed on Thursday as
dealers bought superlong bonds ahead of the auction — instead
of selling to hedge their positions as they usually do — to
stock their inventories in anticipation of strong post-auction
demand.

The auction’s bid-to-cover ratio, a gauge of demand, fell to
4.46 from a record high 4.60 at the previous offering in June,
although this was still much higher than 3.31, the average from
the past 12 sales. [ID:nMOFGV5002] (TENDER01: )

The robust auction outcome reflected the wider variety of
investors getting involved in superlong maturities, said Keiko
Onogi, a senior JGB strategist at Daiwa Securities Capital
Markets.

“The relatively low coupon didn’t appear to dampen demand
from buyers getting involved in the superlongs for trading
purposes. These investors represent a change in demographics,
joining the traditional buy-and-hold investors of
superlongs.”

The 1.8 percent coupon on the new 20-years was the lowest in
six years.

Superlongs have long been the domain of buy-and-hold
investors like life insurers, but recent data has pointed to a
growing presence of investors like regional banks, “shinkin”
co-op banks and agricultural institutions.

Bond investors such as domestic banks have been putting more
money to work in superlongs recently to boost returns as yields
at the shorter end have fallen to multi-year lows.

Superlongs also present investors with opportunities for
potential capital gains due to increased volatility, traders
said.

On a monthly basis, Japan’s benchmark 10-year yield has been
declining since April, tugged lower by factors including
Europe’s sovereign debt crisis, prospects of a global economic
slowdown and hopes for fiscal austerity at home.

While the influence of the debt crisis and fiscal austerity
hopes have receded, prospects of an economic slowdown have been
kept alive following a string of downbeat indicators from the
United States.

Market focus has recently shifted to the Federal Reserve and
whether it will maintain a low rate policy longer than expected.

The 20-year yield (JP20YTN=JBTC: ) declined 4 basis points to
1.765 percent and the 30-year yield (JP30YTN=JBTC: ) also dropped
4 basis points, to 1.830 percent.

The five-year/20-year yield spread tightened by 3 basis
points to 143.5 basis points. It has tightened by about 14 basis
points over the past month.

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(Editing by Joseph Radford)

JGB 10-yr yield hits 7-yr low after Bernanke, auction