JGBs fall on struggling Treasuries; 2-yr sale steady

* 10-year yield climbs to 3-week high, curve steepens

* Some see yield rise boosting demand at 10-yr sale next week

* Steady 2-year auction underscores short end’s stability

* Futures’ fall deepens after “death cross” of 5-, 25-day MAs

By Shinichi Saoshiro

TOKYO, Oct 27 (BestGrowthStock) – Japanese government bonds fell on
Wednesday with the benchmark 10-year yield rising to a three-week
high after a continued retreat in U.S. Treasuries dampened
sentiment, as the market took a more cautious stance on likely
Fed easing.

The short end bucked the trend and held firm, with ample
demand at a two-year bond auction underscoring the zone’s
stability under the Bank of Japan’s very low rate policy.

The yield curve steepened, retracing some of the modest
flattening seen earlier this week, with the market wary of
potential fallout should easing by the U.S. central bank not live
up to expectations that have heightened over the past few weeks.

“The fall in Treasuries added to the bearish mood which had
been brewing during the last few days of losses,” said Makoto
Yamashita, chief Japan interest rate strategist at Deutsche
Securities.

“The market appears to have perhaps been a bit excessive in
the way it has priced in easing, and what we are seeing is a
reaction against this.”

The 10-year JGB yield (JP10YTN=JBTC: ) climbed 4.5 basis points
to 0.945 percent, its highest since the BOJ eased policy more
than three weeks ago at an Oct. 5 meeting.

After the easing, the 10-year yield slipped to a seven-year
low of 0.820 percent, which market players said may have been
overdone.

December JGB futures (2JGBv1: ) shed 0.24 point to 143.18, for
their biggest daily decline in three weeks.

The five-day moving average broke below the 25-day moving
average — a bearish technical phenomenon known as a “death
cross” — deepening the futures’ losses by encouraging some
speculators to add to their short positions, traders said.

LONGER-DATED BONDS UNDERPERFORM

Longer-dated JGBs underperformed, with losses in
shorter-dated debt — which benefit more from the central bank’s
low rate policy — remaining modest.

The long end is likely to remain under selling pressure ahead
of next week’s 10-year JGB sale, although the rise in yields
could help to make the new paper more palatable to investors,
market players said.

“The 10 years have been met by steady bargain hunting during
the recent yield rise, so underlying demand is there,” said a
trader at a European brokerage.

“The rise in yields should help the auction, since buyers
would not have been excited to see the offer held when the
10-year yield was well below 0.900 percent.”

The 10-year/20-year yield spread widened to 87 basis points,
edging back towards a 2-