JGBs tumble most in 3 months on deficit worries

TOKYO: Japanese government bond prices dropped on Thursday, with the benchmark futures posting their biggest daily fall in three months, as investors anticipated possible fiscal expansion both in Japan and the United States.

The 10-year JGB yield rose 2.5 basis points to 0.075 percent , its highest in two months, while the price of the benchmark 10-year JGB futures  dropped 0.32 point to 150.26, the biggest decline since June 30.

U.S. President Donald Trump proposed on Wednesday big income and corporate tax cuts but the plan contained few details on how to pay for the tax cuts without expanding the budget deficit, helping to boost long-term U.S. bond yields.

In Japan, Prime Minister Shinzo Abe called a snap election, as fresh opinion polls showed a fledgling conservative party led by popular Tokyo Governor Yuriko Koike, who called for a delay in a planned tax hike, was gaining momentum ahead of the expected Oct. 22 vote.

Abe himself has pledged to spend on education and child care, using some of the revenue from the planned increase from a national sales tax, rather than curtailing debt.

As the Bank of Japan's massive bond buying dominates, the JGB market rarely reacts to the fiscal outlook, but an unusual confluence of similar fiscal drives in the United States and Japan led to some selling.

"No matter how the election will play out, one thing is certain - it is not going to move to strengthen the fiscal discipline," said Naomi Muguruma, senior strategist at Mitsubishi UFJ Morgan Stanley Securities.

Besides the fiscal policy outlook, expectations of a possible boost to the economy from fiscal policy, both in Japan and Europe, are supporting share prices and denting the appeal of low-yielding JGBs.

The yield curve steepened, in line with U.S. Treasuries, as longer-dated yields rose more than shorter ones.

The 20-year yield rose 2.5 basis points to a two-month high of 0.595 percent, while the 30-year yield gained 3.5 basis points to 0.885 percent.

Still, most market players expect a rise in JGB yields to be eventually blocked by the BOJ, which has pledged to keep the 10-year yield "around zero percent."

The BOJ has offered to buy unlimited amount of 10-year bonds at 0.11 percent to limit an increase in yields.

"In the near-term, we are likely to see some profit-taking at the start of a new Japanese half-year (from October) and JGB yields could test the top part of their range. But from then on, rise in yields will likely stop," said Naoya Oshikubo, yen rates strategist at Barclays.