Ten-yr JGBs reverse losses, gain on firm auction results

* 10-yr bond auction draws surprisingly good demand

* Weakening economic prospects hurt longer-dated bonds

* 10-yr bond yield to move between 1.1 to 1.3 pct – analyst

By Chikafumi Hodo and Akiko Takeda

TOKYO, April 5 (Reuters) – Ten-year Japanese government
bonds reversed early losses on Tuesday after the first auction
of the maturity since the March 11 devastating quake and tsunami
drew surprisingly good demand, and the 10-year yield dropped for
the first time in five days.

But longer-dated maturities continued to be hurt by concerns
that Japan’s government will have to increase bond issuance to
pay for reconstruction efforts amid worsening economic prospects
as the crisis at the crippled Fukushima nuclear plant looks set
to drag on for months.

June 10-year futures (2JGBv1: Quote, Profile, Research) climbed 0.04 point
to 139.27, rebounding from 139.03, their lowest since March 11
when a devastating earthquake struck northeast Japan.

The 10-year yield dropped 2.0 basis points to
1.270 percent. It had climbed as high as 1.300 percent on
Monday, the highest since March 10.

“Brokerages and banks appeared to be selling medium- and
longer-maturities in order to hedge their positions earlier
today, but they covered these positions after looking at good
auction result, placing bids mainly in longer-maturities,” a
trader at a Japanese bank said.

The two-year yield was unchanged at 0.205
percent and the five-year yield rose 0.5 basis
point to 0.505 percent.

The 20-year yield was steady at 2.060 percent
and the 30-year yield climbed 1.0 basis point to
2.210 percent.

The five-year/10-year yield spread tightened to 76.5 basis
points after it widened to 79.5 basis points, the highest since
mid-September, on Monday.

A 2.2 trillion yen ($26 billion)10-year bond sale on Tuesday
drew good demand, attracting bids 3.97 times the amount
accepted, up from 2.91 at the previous auction and the highest
since the August offering.

The ratio was also higher than the 3.15 average for the past
12 sales. See .

The tail was 0.02, tightening from 0.09 at the previous
auction last month. The tail is the difference between the
average and the lowest price at a sale. A tighter tail suggests
there is more consensus about where the new bonds should be
priced and is regarded as a sign of strong demand.

The tender was a re-opening of the 1.3 percent coupon No.
313 issue sold in March.

Analysts said before the sale that 10-year bonds looked
cheaper than other maturities such as five years, and that the
offering might be supported by ample cash in money markets, but
had thought strong bids were unlikely given the mounting
concerns about Japan’s fiscal burden.

“The auction results were good. It attracted solid bids,
which showed that plenty of investors were willing to buy the
10-year JGBs at 1.3 percent,” said Makoto Yamashita, chief Japan
interest rate strategist at Deutsche Securities.

“Sentiment is good and the key 10-year bond yield should move
in a range of around 1.1 to 1.3 percent. Having put the auction
behind us, the focus will be on investors’ appetite at upcoming
auctions of other issuances, particularly in the short- to
medium-term zone.”

He also said the market will also watch the outcome of the
European Central Bank’s policy-setting meeting this week as well
as movements of interest rates of other countries and moves in
foreign exchange.
($1=84.16 Japanese yen)

(Editing by Edwina Gibbs)

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Ten-yr JGBs reverse losses, gain on firm auction results