TOKYO: Long-dated Japanese government bonds slipped on Wednesday as brokers found only limited investor demand for 30-year debt auctioned the previous day, and Japanese share prices jumped unexpectedly.
Still, shorter maturities held firm, steepening the yield curve, as many market players expect brisk demand at a 2.5 trillion yen five-year JGB auction on Thursday.
Selling started in so-called super long bonds, such as 20- and 30-year bonds after brokerage firms struggled to find buyers for 700 billion yen of 30-year bonds auctioned on Tuesday after their strong bids led to a strong outcome of the tender.
The auction's tail -- the gap between the lowest and average prices -- was a tight 0.05, matching a low set in February 2010. The bid-to-cover ratio was 3.52, the highest since September.
"The 30-year bonds auctioned yesterday were not selling that well in the secondary market," said a trader at a European brokerage.
The 30-year JGB yield rose 1.5 basis points to 1.935 percent at one point, its highest in three weeks, before stepping back to 1.925 percent, still up 0.5 basis point on the day. The 20-year yield also climbed a half basis point to 1.745 percent.
The market took a hit after the Nikkei share average jumped more than 1 percent on stop-loss short-covering by speculators.
That pushed the 10-year JGB futures to as low as 142.49, before closing down 0.05 point at 142.55. Trade volume in the day session was largest in over a month at 24,828 contracts.
The futures have strong support around 142.35, including its 25-day moving average of 142.38, the Ichimoku kijun line of 142.36 and cloud top at 142.33.
In the cash bond market, the 10-year yield rose 0.5 basis point to 0.965 percent, pulling further away from a 14-month low of 0.935 percent hit on Monday.
Dealers said that yields below 0.950 percent were likely to invite profit-taking, a move that Japanese banks have been making over the last two days.
"JGBs are one of few instruments on which investors have unrealised gains. There could be some more profit-taking ahead of book-closing by Japanese banks," said a fund manager at a Japanese asset management firm.
NOT ENOUGH IMPROVEMENT
Still, the market is supported by the widespread perception that improvements in the euro zone so far this year are not enough to prompt investors to shift their funds out of bonds.
Since the turn of the year, European share prices edged up and euro zone government debt yields have fallen.
But many market players say it is due to massive liquidity injection by the European Central Bank and that the debt crisis is still far from solved, with talk between Greece and its creditors on swap deals still up in the air.
"There's no change in the fact that European banks loathe holding risk assets. They may buy short-term (European periphery) government bonds but they probably will not buy long-term bonds," said Seiya Nakajima, chief economist at Itochu Corp.
Indeed shorter maturities bucked the trend to gain even ahead of Thursday's five-year JGB auction as market players expect decent demand there.
The five-year yield dipped 0.5 basis point to 0.340 percent from a two-week high of 0.345 percent touched on Tuesday.
"As long as the euro zone debt crisis is brewing, JGBs will serve as a safe harbor," said the fund manager.
The five-year yield has been stuck around narrow trading band around the yield of 0.340 percent since September.
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