Benchmark JGB yields inch down as BOJ operations support
* JGBs shrug off rise in core consumer prices
* Yield curve flattens as superlong zone outperforms
* Stock selloff has limited impact on JGB demand
TOKYO, July 26 (Reuters) - Japanese government bonds ended the week on a high note Friday, with the benchmark yield inching back toward a two-month low hit this week as investors shrugged off data showing consumer prices marked their fastest rate of increase in nearly five years. Bank of Japan operations also underpinned the cash bond market, particularly at the longer end of the yield curve. In its regular asset-purchase operations, the BOJ offered to buy outright 200 billion yen ($2.01 billion) of JGBs with residual maturity of one year to three years, 300 billion yen of JGBs with three to five years left to maturity, and another 200 billion yen with more than 10 years remaining. "Lately, institutions buy JGBs at auctions, and then sell them to the BOJ in operations, and these are the flows. There aren't many other factors that can influence this," said Tomohiro Miyasaka, fixed income analyst at Credit Suisse in Tokyo. The 10-year yield edged down half a basis point to 0.790 percent, moving toward 0.770 percent touched twice this week, which was its lowest since May 14. The 10-year JGB futures contract finished 0.10 point higher at 143.63, after ending the morning session nearly flat, and moving back toward a two-month intraday high of 143.85 touched on Tuesday. Volume of 18,410 contracts was relatively light, and fell below the previous session's 23,218 contracts.
SHARP EQUITIES SELLOFF While recent movements of Japanese stocks and JGBs don't always correlate as the BOJ's massive asset-buying supports the bond, a sharp selloff in equities on Friday might have added some extra appeal to fixed-income assets. The Nikkei stock average skidded 3 percent. "Stocks are weak today, and while this has no direct effect on the JGB market lately, some investors such as Japanese banks have certainly been big sellers of JGBs in recent weeks, so some probably thought this was as good a time as any to buy back some positions," said a fixed-income fund manager at a Japanese trust bank in Tokyo. Japan's three major banking groups slashed their JGB holdings by 20 percent to a combined 90 trillion yen or so in the April-June quarter, the Nikkei business daily reported on Friday.
JGBs gained in the face of data showing a rise in Japan's consumer prices, which was in line with both economists' and market participants' expectations. Core consumer prices turned positive and rose 0.4 percent in June from a year earlier, matching the median estimate of economists polled by Reuters. "CPI was stronger than most people had expected, but looking at the breakdowns, it's mostly due to higher energy prices on the back of the yen weakness," said Naomi Muguruma, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities. "So I think there was little surprise in terms of the factors that pushed up the CPI, and also market participants had expected the CPI would turn to positive," she said, adding that she expects the benchmark 10-year JGB yield to trade in a narrow range centered around 0.80 percent in the coming sessions. Japanese Finance Minister Taro Aso said on Friday in a regular press conference after a cabinet meeting that the speedy CPI rise showed that Japan was gradually shifting to inflation from deflation. Japanese Economics Minister Akira Amari said domestic prices were gradually rising towards the government and central bank's two percent inflation target. Still, some BOJ policymakers are becoming more vocal in expressing concerns about the economic outlook, which could undermine what has been a unified public position of optimism key to the central bank's reflationary message.
The yield curve flattened as the superlong sector outperformed, with the 20-year yield dropping 2.5 basis points to 1.705 percent, and the 30-year yield shedding 3.5 basis points to 1.825 percent. The spread between 10-year and 20-year yields, which had widened to a four-month high of 94.5 basis points on Wednesday on a last-traded basis, shrank to 91.5 basis points. The spread between the yields on 10-year and 30-year debt contracted to 103.5 basis points from a four-month high of 108 basis points hit on Wednesday.