* Super-longs hit by LDP’s reflationary policy proposals
* The 10-20 year yield spread widest since 1999
* Short-term maturities gain on speculation of more easing
* Some say “Abe trade” will not last long
By Hideyuki Sano
TOKYO, Nov 16 (Reuters) – Long-dated Japanese government
bond prices fell while shorter maturities eked out gains on
Friday on speculation that a likely change in the country’s
government could lead to more aggressive easing in monetary and
fiscal policy.
Since Japanese Prime Minister Yoshihiko Noda signaled
earlier this week he would call an election on Dec. 16,
longest maturities suffered the most, pushing up the yield
spread between the 10- and 20-year paper to the highest level
since 1999.
“Expectations of more monetary easing and loosening in
fiscal discipline are in the play at the moment,” said Akihiko
Inoue, chief fixed income strategist at Mizuho Investors
Securities.
The conservative Liberal Democratic Party, seen as likely to
return to power, has called for more public spending and its
leader Shinzo Abe said on Thursday he wanted the BOJ to consider
zero or sub-zero interest rates.
The 20-year yield climbed 1.5 basis point to 1.685 percent
, near the 1.7 percent level where it peaked three
times in the past half year.
Its spread over the 10-year yield rose to 95.5 basis points,
a lofty level not seen since July 1999, having risen four basis
points in the past few days.
The 30-year yield also gained 1.5 basis point to 1.950
percent, near seven-month high of 1.960 percent
hit last month.
On the other hand, yields on short-dated notes fell, with
the five-year bond yield falling 1.0 basis point to 0.175
percent, edging near a nine-year low of 0.165
percent hit in August.
Benchmark euroyen futures briefly hit a four-month high of
99.755 as Abe’s comments sparked speculation that the
BOJ may scrap 0.10 percent interest payments on excess reserves,
which has effectively served as a floor for money markets.
The price of 10-year JGB futures, which in reality
track the cheapest to deliver seven-year zone, rose 0.11 point
to 144.70, briefly hitting a nine-year high of 144.73.
Caught between firm short- to medium-term notes and fragile
longer bonds, the 10-year yield stood flat at 0.730 percent
, unable to test its previous trough of 0.720
percent hit in July at the height of European debt crisis.
“Everybody agrees that the curve will have to steepen. But
the direction of the market is uncertain,” said a fund manager
at a Japanese bank.
“The election story will become stale soon, perhaps next
week. Nonetheless, if Japan is to become the only country in the
world to ease both monetary and fiscal policy, then this could
become a big trend,” he added.
Others think the latest market fad of bond steepening, yen
selling and Japanese stock buying, already dubbed as “Abe
trade”, will not last long and JGBs will soon return to their
regular habit of tracking U.S. bonds.
“People are doing this for a short-term trading purpose. In
the long-run, given the U.S. fiscal cliff and concerns about
Europe, bonds will be supported,” said Takeo Okuhara, fund
manager at Daiwa SB Investments.
Many market analysts also caution that it is far from
assured whether the BOJ cuts rates to zero despite the call from
Abe. BOJ Governor Masaaki Shirakawa has openly opposed the idea,
saying that zero rates will kill money markets.
Some Japanese banks don’t seem to believe in that scenario,
said a trader at a Japanese brokerage.
“Big banks were selling three- and four-year sectors quite a
lot. No one thinks the BOJ will scrap interests on excess
reserves,” he said.
