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JGBs mostly rise, off highs as BOJ eases again as expected

Lisa Twaronite
Tuesday, 30 Oct 2012 | 7:01 AM ET

* 10-yr futures end up but pare sharp gains after BOJ announcement

* 5-yr yield flat after hitting nearly 3-month low ahead of BOJ

TOKYO, Oct 30 (Reuters) - Japanese government bonds mostly rose on Tuesday, but pulled back from early highs after the Bank of Japan announced further easing steps as expected.

The BOJ said it will increase its asset purchase scheme by 11 trillion yen ($138 billion), including 1 trillion yen in risk assets such as Exchange-traded funds (ETFs).

``In line with expectations, they increased asset buying funds,'' said Naomi Muguruma, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley.

``JGB futures declined in disappointment over the announcement,'' she added, which came less than 15 minutes before the futures trading session ended.

The BOJ does not schedule an announcement time after its policy meetings, and the fact that this one took longer than usual raised market hopes that the central bank was mulling steps beyond those that were already predicted, market participants said.

The 10-year yield was down 1 basis point at 0.760 p ercent in late afternoon trade, after falling as low as 0.755 percent, matching this month's low of 0.755 percent.

A break below that would bring it to its lowest level since Aug. 7. After the BOJ's announcement, the 10-year yield briefly rose as high as 0.770 percent.

The 10-year JGB futures contract ended up 0.18 point at 144.40 after dropping as low as 144.27 after the BOJ decision. Ahead of the announcement, they rose to 144.47, their highest level since Aug. 6.

The BOJ now buys debt with up to three years left to maturity in its asset purchase programme, and opted not to extend that duration, although many investors and strategists believe it will eventually do so. These expectations have supported shorter maturities.

The yield on the 5-year JGB was flat at 0.185 percent, after it slipped half a basis point to 0.180 p ercent ahead of the BOJ announcement, its lowest level since Aug. 9.

Data on Tuesday had reinforced market expectations that the central bank would act to support the economy. Industrial production fell last month at its fastest pace since last year's disaster, and job availability dropped for the first time in more than three years.

Shortly after the policy announcement, the BOJ also said that it cut its economic and price forecasts in its semiannual outlook report but maintained its view that the Japanese economy will resume a moderate recovery as global growth emerges from a slowdown.

The yield curve steepened as superlong debt underperformed in thin morning trade, though those maturities pared losses in late trading.

The yields on 20-year debt added half a basis point to 1.690 percent, down from a session high of 1.695 percent, while yields on the 30-year bonds also added half a basis point to 1.950 percent, down from 1.960 percent earlier.

Along with the policy announcement, the central bank released a statement signed by Governor Masaaki Shirakawa, Finance Minister Koriki Jojima and Japanese Economics Minister Seiji Maehara in which they pledged that the government and BOJ will ``work together and make their utmost efforts'' to help Japan overcome deflation.

``This is the first time the government and BOJ made an official accord, or joint statement, but many people expect the government will be changed sometime soon, so how long this joint statement will have any actual effectiveness is another issue,'' Muguruma said.