JGBs bounce on Nikkei, supply woes limit flattening

* Curve flattens on bargain hunting, duration extensions

* But a repeat of massive flattening seen earlier unlikely

* Supply woes to edge up as Japan eyes next FY budget

* Government’s new stimulus steps could also enhance concerns

* Late turbulence to dent superlong demand, add to steepening

By Shinichi Saoshiro

TOKYO, Aug 31 (BestGrowthStock) – Japanese government bonds gained on
Tuesday, bouncing back from the previous day’s losses, as Tokyo’s
Nikkei slipped on a fall on Wall Street and on a yen that
remained bullish despite easing by the Bank of Japan.

The JGB yield curve flattened as investors hunted for
bargains in superlongs after a sharp steepening of the curve over
the past few days, which some say had a spillover effect on other
G3 government bond markets last week.

The benchmark 10-year yield (JP10YTN=JBTC: ) fell 2 basis
points to 1.000 percent.

It had fallen to a seven-year low of 0.895 percent earlier
this month before surging to 1.105 percent on Tuesday amid the
sharp curve steepening, before declining again after the easing
by the BOJ failed to check the yen’s advance.

An added incentive for superlong purchases on Tuesday came
from index-following buyers needing to extend the duration of
their portfolios for the end of the month.

The 10-year/30-year yield spread tightened to 74 basis points
from a five-week high of 75.5 basis points. The spread had
flattened to an 18-month low of 60 basis points in mid-August on
purchases of superlong debt by domestic investors ranging from
regional banks to larger financial institutions looking for
higher yields.

But analysts said such a massive bull flattening may not be
repeated for a while, with the curve seen coming under gradual
steepening pressure.

“The latest easing by the BOJ will help anchor midterm JGB
yields by pinning down longer-term money market rates,” said
Makoto Noji, a senior market analyst at Mizuho Securities.

“But on the other hand investors will be more cautious about
buying longer-dated JGBs after the rollercoaster ride of the past
few days, which raised volatility in superlongs. Demand may not
return to previous levels for a while even if supply concerns
ebb.”

SUPPLY CONCERNS

The fiscal austerity stance of Prime Minister Naoto Kan’s
government, which had helped curve’s bull flatten, was dented by
recent political developments which raised the possibility of a
less fiscally conservative candidate taking power.

The selling in the superlongs gained momentum, joined by
profit taking by banks prior to Japan’s fiscal year half-end on
Sept. 30.

Supply concerns traditionally heighten in the autumn, when
Japan begins forming the next fiscal year’s budget. Focus is on
how much the government will have to rely on debt for funding,
with tax revenues expected to fall short of spending.

Supply woes could also be heightened after Prime Minister
Naoto Kan said the government could compile an extra budget if
necessary, after the cabinet decided on Monday to compile
economic steps using reserves from this fiscal year’s budget.
[ID:nTOE67T085]

September 10-year JGB futures (2JGBv1: ) climbed 0.23 point to
142.68, pulling further away from a one-month low of 141.60
struck the previous day.

The 30-year yield (JP30YTN=JBTC: ) fell 1.5 basis points to
1.740 percent. It declined to a seven-year low of 1.540 percent
last week before jumping to 1.820 percent on Monday.

The Nikkei (.N225: ) shed 2.6 percent. The dollar stood at
84.30 yen (JPY=: ), with the Japanese currency clinging near a
15-year high against the dollar after the BOJ’s easing steps the
previous day failed to scare investors from betting on further
rises. [.N] [FRX/]

At an emergency meeting on Monday the central bank decided to
increase the volume of money available to banks under its
fixed-rate fund supply operation to 30 trillion yen ($351
billion) from 20 trillion yen. It also put in place a six-month
fund operation in addition to the three-month loan programme
already in place. [ID:nTKZ006508]

The easing steps were in line with market expectations, with
the BOJ seen saving more aggressive steps — such as increasing
the amount of JGBs it buys from the market — for when there is
clearer evidence of a slowdown in the country’s fragile economy.
(Editing by Joseph Radford)

JGBs bounce on Nikkei, supply woes limit flattening