JGBs skid as banks adjust positions after 20-year sale
* Tail shrinks at 20-year auction, implying decent demand
* 10-year yield moves away from this week's two-month low
* 10-year futures slip, but volume picks up slightly
TOKYO, July 25 (Reuters) - Japanese government bonds fell on Thursday despite decent demand at a 20-year sale, with the benchmark 10-year yield moving away from a two-month intraday low matched in the previous session as domestic banks adjusted their portfolios. The 10-year yield added 3 basis points to 0.800 percent, moving away from 0.770 percent touched in the previous two sessions, which was its lowest since May 14. "I think we've seen the richness of the 7-year get repriced over the last few weeks," said Shogo Fujita, chief Japan bond strategist at Bank of America Merrill Lynch in Tokyo. He said some of the selling was probably due to Japanese banks taking off some of their hedges after Sunday's election. Prime Minister Shinzo Abe's ruling bloc emerged victorious in Sunday's upper house election, strengthening his mandate to pursue reflationary policies. The 10-year JGB futures contract ended down 0.26 point at 143.53, retreating from a two-month intraday high of 143.85 on Tuesday. Volume of 22,378 contracts was relatively thin, although it was the highest in two weeks and was nearly twice Tuesday's 11,860 contracts, which was the lowest since Dec. 25.
The Ministry of Finance offered 1.2 trillion yen ($11.98 billion) of 20-year bonds, reopening the current issue with a coupon of 1.7 percent. Last month, the ministry announced that the July and August 20-year sales would both reopen the June issue. It said that any changes to the plan warranted by market conditions would be announced a week prior to the sale. The notes sold at the lowest price of 99.60, and drew bids of 2.61 times the amount offered, down from the previous sale's bid-to-cover ratio of 4.23 times. But the tail between the average and lowest accepted prices came in at 0.06, shrinking from 0.10 at last month's offering. A smaller number means stronger demand for the bonds. "I'd say it was okay, it wasn't thrilling," Bank of America Merrill Lynch's Fujita said. According to International Financing Review, a Thomson Reuters publication, a few primary dealers sold cash 10-year JGBs to hedge their long positions in the new 20-year JGBs, which pushed up the benchmark yield. IFR also reported that one Japanese megabank unloaded off-the-run 20-year JGBs in the morning session and then bought around a quarter of the new 20-year bonds, intending to sell some part of them to the Bank of Japan in its asset-purchase operations. The 20-year yield added 2 basis points to 1.735 percent, while the 30-year yield tacked on half a basis point to 1.855 percent. Weaker U.S. debt prices pressured JGBs, although the two have not always moved in tandem lately due to diverging expectations of respective monetary policies. On Wednesday, U.S. Treasuries prices fell after a sale of $35 billion in new five-year notes met low demand.
Capital flow data for last week from the Ministry of Finance, released on Thursday, showed Japanese investors were still seeking higher yields overseas, with net buying of foreign bonds continuing for a third straight week.