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JGBs firm on concerns over slowing global growth

Tuesday, 9 Oct 2012 | 3:02 AM ET

* 10-yr futures erase early losses, end higher

* 10-yr, 30-yr yield spread at widest since March 2008

By Lisa Twaronite

TOKYO, Oct 9 (Reuters) - Japanese government bonds rose on Tuesday, as heightened worries about slowing global growth and sagging stocks supported demand for fixed income assets.

The International Monetary Fund cut its global growth forecast on Tuesday to a 3.3 percent expansion for 2012, down from its July estimate of 3.5 percent, and warned of a prolonged slump if U.S. and European policymakers fail to address their economic problems.

The IMF also said on Tuesday China's economic growth is expected to weaken to 7.8 percent this year.

"Any expectation-driven uptick in yields will be short-lived. A rise in yields will be unsustainable unless there's an improvement in the global macro picture, and that's what we're not getting right now," said Le Ngoc Nhan, a strategist at Morgan Stanley MUFG.

On Monday, the U.S. and Japanese bond markets were both closed for public holidays.

On Tuesday, JGBs initially weakened, with futures opening lower after a sell-off in U.S. Treasuries on Friday following upbeat U.S. employment data. The U.S. Labor Department said the unemployment rate fell to a four-year low of 7.8 percent in September, down from 8.1 percent in August, as 114,000 jobs were added.

"Investors who were hoping to buy on a dip today after Friday's U.S. employment data were disappointed, when that sell-off failed to emerge," said a fixed-income fund manager at a Japanese trust bank.

"There are still people who want to buy, but the time is not now," he said.

The Nikkei share average ended down 1.1 percent.

The 10-year yield shed half a basis point to 0.770 percent after earlier rising to 0.780 percent, moving back toward an eight-week low of 0.755 percent last week.

Ten-year JGB futures ended up 0.05 point at 144.15, after falling as low as 144.03 in the morning session.

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On the JGB supply-side, superlong maturities could face pressure ahead of the Ministry of Finance's 30-year bond sale on Thursday.

Yields on 30-year debt were flat at 1.920 percent after earlier rising half a basis point, while those on 20-year bonds fell half a basis point to 1.655 percent.

The spread between the 10-year and 30-year yields rose as high as 1.150 points, matching a level hit last week which was its widest since March 2008, and up sharply from 0.980 point in mid-July.

A gauge of sentiment in the Japanese government bond market fell deeper into negative territory, though investors expect buying at the beginning of the second half of the fiscal year to keep yields from rising far from recent ranges, a weekly Thomson Reuters survey showed on Tuesday.

In recent weeks, some investors have built up long positions in the 10-year tenor, which could be setting the stage for a correction, some strategists said.

"If there is a rise in overseas yields on top of such a domestic build-up in excess long positions, there could be a temporary surge in yields," said Barclays strategist Noriatsu Tanji in a note to clients.

"We still expect yields to stay in a range around 0.8 percent for now due to domestic demand factors, but also see a gradually increasing risk that they will rise," Tanji said.

Some market participants and strategists say that domestic demand would emerge to chase bargains on any rise in yields.

"Japanese investors are not over-invested. Life insurers bought in March and August when rates went up quite sharply, but apart for those two occasions, compared to past years' averages, their amount of buying so far is not large," said Morgan Stanley MUFG's Nhan.

"If rates go higher from here, given the very steep curve we have right now, there will be a lot of demand waiting at higher yield levels," he said.

(Editing by Richard Borsuk)

((lisa.twaronite@thomsonreuters.com)(81 3 6441 1870 Reuters Messaging: lisa.twaronite.thomsonreuters.com@reuters.net))

Keywords: MARKETS JAPAN JGB/

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