JGB futures hit 7-yr high, economic pessimism grows

* 5-year, 10-year yields touch fresh 7-year lows

* Monthly duration extensions pull down long-dated yields

* JGBs dip briefly after upbeat BOJ tankan

* But JGBs scooped up by bargain hunters on price dips

* 10-year/30-year yield spread flattest in 13 months

By Shinichi Saoshiro

TOKYO, July 1 (BestGrowthStock) – Japanese government bonds rallied
on Thursday, with futures climbing to a seven-year high, as
investor demand for debt soared with risky assets such as stocks
battered by growing pessimism on the global economy.

The euro zone’s sovereign debt crisis, hopes for fiscal
reform in Japan and the prospect of the global economic recovery
losing steam have boosted demand for safe-haven debt, helping
bond futures gain more than 3 points in April-June, their biggest
rise in nine quarters.

Persistent weakness in the U.S. housing and labour markets
has increased doubts about the strength of the global recovery.
Manufacturing data released on Thursday showing that China’s
rapid economic growth was slowing added to the gloom.

Under such conditions focus was on whether the benchmark
10-year yield, which fell 2 basis points to a seven-year low of
1.060 percent (JP10YTN=JBTC: ) on Thursday, would continue
declining.

“It is possible for the 10-year yield to break through 1
percent,” said RuiXue Xu, a fixed-income strategist at RBS
Securities.

“Investors with their huge excess of money due to the gap in
lending and deposits are supporting the market from the
supply-and-demand side, while deflation is supporting it from an
economic point of view.”

The yield curve bull flattened, with superlongs supported by
index-following pension funds which usually extend durations
towards the end and beginning of each month.

The 10-year/30-year spread tightened to 77.5 basis points,
its flattest in 13 months.

Market players said superlongs could continue to attract
demand from buyers such as life insurers who were wrong-footed in
the second quarter, expecting yields to rise.

Midterm JGBs, which had lagged the recent bull runs by
long-dated and superlong bonds, also gained significantly on
Thursday with the five-year yield (JP5YTN=JBTC: ) falling 2.5 basis
points to 0.320 percent, a fresh seven-year low.

“The yield curve has been flattening led by superlongs. Bull
flattening seen in European and U.S. government debt markets had
added momentum to the flattening in Japan,” said a fund manager
at a domestic investment firm.

“The flattening led by the superlongs has reignited bids for
midterm JGBs like the five-years. Investors think there is now
more room for midterm yields to fall because the 10-year yield is
approaching the 1 percent threshold.”

The 20-year yield (JP20YTN=JBTC: ) declined 4.5 basis points to
1.760 percent and the 30-year yield (JP30YTN=JBTC: ) dropped 3.5
basis points to 1.835 percent, a six-month low.

September 10-year JGB futures (2JGBv1: ) rose 0.22 point to
141.88 after hitting 141.95, their highest since August 2003.

At nearly 38,000 lots, volume in futures was the highest in
6-