JGBs trim losses, long bonds smart from fiscal worries

* 10-yr bonds trim losses after yield marks highest since
mid-Feb

* Curves seen remaining steep as worries over debt issuance
persist

* 30-yr bond sale to gauge demand from buy-and-hold
investors

By Hideyuki Sano and Akiko Takeda

TOKYO, April 8 (Reuters) – Japanese government bond prices
trimmed earlier losses as buyers emerged on dips, but
longer-dated debt was seen continuing to exert steepening
pressure on the yield curve on the threat of a future increase
in debt issuance.

Futures volumes have recovered to over 25,000 lots per day
for the past two days, the highest since mid-March, with
possible speculative moves seen.

June 10-year Japanese government bond futures (2JGBv1: Quote, Profile, Research)
dipped to a two-month low of 138.38, but they trimmed losses as
buyers emerged on dips, players said.

In cash bonds, the yield on current 10-year debt climbed 2.5
basis point to 1.330 percent , its highest since
mid-February. Its spread over the two-year yield rose to 112
basis points, the highest in 10 months.

The recent steepening trend eased somewhat,
however, with the 20-year yield edging down 0.5 basis point to
2.085 percent after hitting a three week high of
2.105 percent the previous day.

But worries about a future increase in government debt sales
continued to hurt long-dated bonds, while short-term paper was
supported by expectations that the Bank of Japan will keep
policy loose and maintain short-term interest rates near zero in
the foreseeable future.

The 30-year government bond yield hit a three-week peak of
2.270 percent before slipping back to 2.250
percent, still up 1.0 basis point on the day ahead of a 700
billion yen 30-year bond sale on Tuesday.

Market participants said investors were wary of
long-dated bonds facing downward pressure because Japanese
insurance companies, big buyers of the maturities, might have
limited appetite due to their need to make insurance payments
after the earthquake and tsunami.

Japan is likely to form an initial supplementary budget
worth a bigger-than-expected 4 trillion yen ($47 billion) for
relief efforts after last month’s disaster, National Strategy
Minister Koichiro Gemba said on Thursday. The budget will focus
on removing debris, building temporary housing and restoring
infrastructure such as schools and providing financial support.

SOME DEBATE

Japanese media have said the government was likely to avoid
more borrowing to fund the initial extra budget, although there
is some debate within the ruling party over whether the
government should issue bonds.

“Whether they issue bonds or not this time does not really
matter. The bottom line is they will have to compile more
supplementary budgets and they will have to increase debt sales
at a certain point. So investors are not in a hurry to buy
bonds,” said Shinji Nomura, chief fixed income strategist at
SMBC Nikko Securities.

Still, bonds are likely to be supported in the near term as
the Japanese economy looks set to suffer a slowdown after
destruction from the natural disaster and disruption in supply
chains, market players said.

“The 10-year yield will rise to around 1.5 percent only
after we see more signs of recovery in the economy on
reconstruction. That will be some time,” said SMBC Nikko’s
Nomura.

(Editing by Joseph Radford)

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JGBs trim losses, long bonds smart from fiscal worries