Ten-yr JGB yield hits 8-1/2 mth low on BoJ speculation

TOKYO: Japanese government bonds rose broadly on Tuesday on a weaker US economic outlook and after sources said the Bank of Japan is expected to ease monetary policy this week if the yen continues to rise quickly enough to trigger currency intervention, pushing the benchmark 10-year yield to an 8-1/2 month low.

"Investors who haven't been able to buy enough JGBs are now being forced to buy because the US economic outlook has weakened and expectations for BOJ monetary easing are increasing," said a fund manager at a Japanese asset management firm.

"Economic fundamentals are usually big factors in moving yields, and it is that way this time as well," he added.

US Treasury debt prices rallied on Monday as a troubled outlook for the US and global economies whetted appetite for safe-haven government debt, sending yields to their lowest in more than eight months.

A closely watched measure of US manufacturing underscored the precariousness of the US economic outlook after gross domestic product figures last week showed minimal growth in the first half of the year.

Three-month euro-yen futures rose 1.0 basis point to 99.670, marking their highest since late-May.

The Bank of Japan is expected to ease monetary policy this week to support a fragile economic recovery if the yen continues to climb fast enough to prompt currency intervention, sources familiar with the central bank's thinking said.

Ten-year cash bonds in ten-year performed better than other maturities, even ahead of a 2.2 trillion yen ($28 billion) 10-year auction.

The Ministry of Finance set a 1.1 percent coupon on the 10-year JGBs it offered on Tuesday, down from 1.2 percent at the previous sale in July and the lowest since May.

A lower coupon makes new bonds less attractive, but market participants expect the tender to be supported by demand from investors who are behind in building up their positions for the current fiscal year. The 10-year yield dipped 3 basis points to 1.045 percent. The yield of five-year bond also fell 1.5 basis points to 0.355 percent. Both yields marked their lowest points since mid-November.

Superlongs -- such as 20- and 30-years -- also performed well. The 20-year yield and the 30-year yield hit fresh nine-month lows at 1.820 percent and 1.970 percent.

September JGB futures are up 0.24 point at 142.02, having hitting a fresh 8-1/2 mth high of 142.05 on Tuesday.

Copyright Reuters, 2011