JGBs rise after Fed vows to keep rates lows; superlongs firm

TOKYO: Japanese government bonds rose broadly on Wednesday after a Federal Reserve pledge to keep rates near zero for another two years pushed Treasury yields to new lows, but gains were limited as investors were wary about chasing yields lower.

In cash bonds, superlongs -- such as 20 and 30 years --outperformed as they recouped losses made after Tuesday's weak 40 year JGB auction. Market participants said that the Bank of Japan's outright purchase of JGBs with maturities more than 10 years helped to lift superlongs.

The 30-year yield, which had jumped as high as 2.030 percent after the 40-year bond sale, declined to 1.960 percent, 2.5 basis points down from Tuesday's close. The 20-year yield was down 1.5 basis points to 1.805 percent .

JGB futures rose but trimmed gains after the Nikkei stock average climbed 1.2 percent to above 9,000. September 10-year JGB futures were up 0.21 point at 142.34 but off a nine-month high of 142.64 marked on Tuesday.

"Because we saw some correction in the JGB market yesterday and with the Fed's pledge, JGBs are being supported by bargain hunting," said Shinji Nomura, chief fixed-income strategist at SMBC Nikko Securities.

But buying in JGBs seems to have run its course for now after the 10-year yield dropped below one percent yesterday and with the Nikkei recovering above 9,000 today, he added.

The benchmark 10 year yield was down 1 basis point at 1.030 percent , though it rose from a session low of 1.015 percent this morning. The yield hit a nine-month low of 0.975 percent on Tuesday.

Speculation is now centering on Fed Chairman Ben Bernanke's appearance at the Aug. 26 Jackson Hole conference, where his comments last year were interpreted as signaling that the quantitative easing programme had that just ended.

With fiscal stimulus seen as out of reach due to a drive for fiscal tightening in major economies, monetary policy is seen as the only option, but there is plenty of uncertainty regarding central banks' ability to stimulate economies with rates already so low, analysts said.

"I doubt share prices will keep rising from current levels as central banks' policies are not helping to lift the real economy, they are simply pumping liquidity by purchasing bonds and keeping rates low," said Jun Fukashiro, chief fund manager at Toyota Asset management.

In its policy statement, the Fed said US economic growth was proving considerably weaker than expected and said inflation would remain contained for the foreseeable future. It added that the unemployment rate, currently at 9.1 percent, would come down only gradually.

Short-dated US Treasury yields fell to record lows on Tuesday, driven by the Fed's pledge to keep interest rates near zero for another two years and by speculation the US central bank would return to the bond market to stimulate the economy.

Copyright Reuters, 2011