JGBs fall as market braces for sale; curve steepens

* Japan offers 10-yr JGBs with lowest coupon in 7 years

* Recent turbulence could result in wide-tailed auction

* Superlongs hit by profit taking after duration extensions

* Japan powerbroker Ozawa confirms challenge against PM Kan

* Market braces for impact on fiscal, monetary policy

By Shinichi Saoshiro

TOKYO, Sept 1 (BestGrowthStock) – Japanese government bonds fell on
Wednesday as dealers and investors sold to make room for a
10-year debt sale, and the yield curve resumed steepening as
superlongs sagged on the underlying prospect of potential
political change watering down the government’s stance on fiscal
austerity.

Japan’s Ministry of Finance offered 2.2 trillion yen ($26
billion) of 10-year JGBs on Wednesday.

The auction will test investor appetite for debt after
turbulence seen over the past week took the 10-year yield from a
seven-year low of 0.895 percent to as high as 1.105 percent.

Market players expected decent demand for the new paper,
which may look affordable to investors as the 10-year yield is no
longer near a seven-year low.

But they also said the results could show a wide tail, the
difference between the average and highest auction price. A wider
tail suggests there is less consensus about where the new debt
should be priced.

“After big swings in yields this week there may not be a
consensus among buyers for an appropriate price for the 10-years,
and this could result in a long tail,” said Katsutoshi Inadome, a
fixed income strategist at Mitsubishi UFJ Morgan Stanley
Securities.

“On the other hand, the bid-to-cover ratio could still be
relatively high as investors fleeing the volatility of the
superlongs could seek refuge in the 10-years.”

The bid to cover ratio is a gauge of demand at auctions, with
a high ratio considered a sign of strong demand.

The auction results will be released at 0345 GMT. Japan’s
Ministry of Finance set a 1 percent coupon on the new paper, 10
basis points lower than the previous sale in August and the
lowest in seven years.

The 10-year yield was up 5 basis points at 1.010 percent on
Wednesday.

The yield curve resumed steepening after flattening the
previous day on aggressive buying of superlong debt from index
following investors extending durations of their portfolios for
the end of the month.

Market players said large banks and regional banks took
profits in superlongs after their prices bounced the previous day
on the duration extensions.

Selling in superlongs began towards the end of last week as
financial institutions have begun booking profits on their books
ahead of the domestic fiscal year half-end.

With lending slumping due to slack demand for funds, capital
gains made by trading in the bond market are a precious source of
revenue for domestic banks, dealers said.

The prospect of potential changes in the government’s
leadership and their impact on fiscal and monetary policy also
helped the curve steepen.

Japanese powerbroker Ichiro Ozawa confirmed on Tuesday he
would challenge Prime Minister Naoto Kan in a party vote, setting
up a clash that risks creating a policy vacuum as Japan struggles
with a strong yen and fragile growth. [ID:nTOE67U052]

“Mr. Kan is at least neutral concerning government finances,
while Mr. Ozawa is a strong advocate of fiscal expansion,” said
Makoto Yamashita, chief Japan interest rate strategist at
Deutsche Securities, in a note.

“As a major promoter of growth in public spending, Mr. Ozawa
naturally seeks strong monetary easing as well. We think this is
a factor for the steepening of the yield curve.”

The yield curve has steepened significantly on the week
following the sell-off seen towards last Friday, which some say
had a spillover effect on the U.S. and euro zone government bond
markets last week.

The 20-year yield climbed 7.5 basis points to 1.735 percent,
heading back towards a seven-week high of 1.835 percent hit on
Monday.

The 10-year/30-year yield spread stood at 72.5 basis points
after rising to a five-week high above 75 basis points on Monday.

The spread had flattened to an 18-month low of 60 basis
points in mid-August as investors sought the higher returns of
superlongs, encouraged in part by the Kan government’s fiscal
austerity stance.

September 10-year futures (2JGBv1: ) fell 0.27 point to 142.72.
(Editing by Joseph Radford)

JGBs fall as market braces for sale; curve steepens