Politics weighs on long-dated JGBs, curve steepens

TOKYO: Long-dated cash bonds underperformed on Monday, weighed by month-end profit-taking amid an absence of active buyers in thin trade ahead of a ruling party vote to decide on a new prime minister.

The yield curve steepened with the 20-year yield climbing 1.5 basis points to 1.870 percent , after rising as far as 1.875 percent, its highest since mid-July. The yield on 30-year JGBs was up 3 basis points at 2.025 percent, the highest in three weeks.

The 10-year year yield was unchanged at 1.040 percent , and the five-year yield stayed flat at 0.330 percent .

The ruling party picks a new prime minister on Monday and little suggests that the nation's sixth leader in five years will have the necessary vision, power or time to tackle a long list of economic ills while coping with a nuclear crisis.

Trade Minister Banri Kaieda, 62, appears to have the lead ahead of the vote by Democratic Party of Japan lawmakers but a run-off is likely as none of the five contenders to succeed outgoing Prime Minister Naoto Kan seems set to win a majority in a first-round vote.

Analysts say the bond market would probably welcome the appointment of Finance Minister Yoshihiko Noda, who is a known fiscal hawk and favours raising taxes to reduce the country's reliance on debt.

If Noda is appointed, it would likely prompt players to cover short positions in hope of tax rises, said a fund manager for a Japanese asset management firm.

But a sharp yield rise in JGBs would be unlikely if another person were appointed, as JGBs have already factored in that these candidates may not be able to do anything drastic to curb public debt.

September 10-year JGB futures were flat at 142.30 clinging to their 20-day moving average at 142.33 on Monday, which is seen as support.

Over 40 percent of market players expect JGB yields to rise this week, a weekly Reuters survey showed on Monday. Most participants were focused on the race to pick the new prime minister, as Japan tries to tackle a long list of economic ills while coping with a nuclear crisis.

But the median forecast for the 10-year JGB yield at the end of the week stayed at 1.050 percent, only 1 basis point higher than its close on Friday of 1.040 percent, on the view that there will be strong investor appetite for buying on any dips.

Copyright Reuters, 2011