TOKYO: Japanese government bonds climbed on Tuesday amid intensifying sovereign debt problems on both side of the Atlantic but gains were capped due to broker hedging ahead of a 20-year JGB auction.
"Market participants' risk-off stance is supporting JGBs but gains are limited because of (the relatively tight) auction schedule before the year end," says Katsutoshi Inadome, fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities.
Lead 10-year JGB futures were up 0.06 point at 143.07, but off a one-year high of 143.14 hit last week.
Ministry of Finance set a 1.7 percent coupon on the 1.1 trillion yen ($14 billion) of 20-year JGBs it is offering on Tuesday, down from 1.8 percent at the previous sale in October and the lowest level since August 2010.
Demand from buy-and-hold investors such as life insurers is expected to help the auction, with many of them planning to shift their holding from foreign bonds which are becoming less attractive due to declining yields. Some buyers, however, could hold off due to a lower coupon and as the maturity offers a less attractive supply outlook than other maturities, analysts say.
A number of JGB primary dealers believe that superlongs such as 20-year bonds could cope with an issuance increase in the fiscal year starting next April, a Ministry of Finance official told reporters after a regular meeting with primary dealers on Friday.
* In cash bonds, 10-year JGBs underperformed, as JGB futures were weighed down by broker hedging and position squaring. The 10-year yield edged up 0.5 basis point to 0.955 percent, off a one-year low of 0.940 percent hit last week.
* But medium-dated and superlong bonds were firmer. The five-year yield inched down 0.5 basis point to 0.305 percent, near a three-month low while the 20-year yield declined 0.5 basis point to 1.700 percent.
A Congressional committee of six Republicans and six Democrats abandoned their efforts to reach a deal on reducing the United States' ballooning deficit as expected, reinforcing investors' perceptions that politicians in Washington were too divided to deal with the debt problem.
The euro zone's crisis crept ever closer to the heart of the continent, with the risk premiums on Spanish, French, Italian and Belgian government bonds rising after Moody's warned that France's triple-A credit rating was under threat.
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