JGBs pare losses after robust demand at 10-year sale
* 10-yr sale bid-to-cover rises to 3.51, highest since May
* 10-yr futures end nearly flat on highest volume in 3 weeks
* Japanese net buying of overseas bonds slows in latest week
TOKYO, Aug 1 (Reuters) - Japanese government bonds pared losses on Thursday after a solid 10-year auction, but remained pressured by weaker sentiment toward debt after the U.S. Federal Reserve signalled no imminent reduction to its bond-buying stimulus. The Fed offered no sign after its latest meeting that it was ready to begin paring the $85 billion in assets it buys each month to stimulate the U.S. economy. "The auction was in line with expectations, but nonetheless, the market did not move so much," said Naomi Muguruma, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities. "I think everyone is waiting for tomorrow's big data in the U.S.," she said. "If the data is extremely strong, I think the market will start to price in an early tapering, and that would push up U.S. Treasury yields and maybe put some upward pressure on JGBs yields as well." The U.S. payrolls report on Friday is expected to show an increase of 184,000 with a chance of an upside surprise after the ADP survey showed private jobs rose 200,000 in July.
Muguruma added that she expected the benchmark yield to stick to a range of 0.75 percent to 0.85 percent in August. The benchmark 10-year yield rose half a basis point to 0.795 percent, off an earlier high of 0.800 percent and edging back toward 0.770 percent touched last week, which was its lowest since May 14. The 10-year JGB futures contract ended down 0.01 point at 143.61, taking back ground after sinking as low as 143.41. Volume of 23,576 was still relatively low, but was the highest since July 11 amid thin summer market conditions. Prices for U.S. Treasuries rose on Wednesday after the Fed's statement, reversing early losses and pushing the yield on the benchmark 10-year Treasury note down to around 2.58 percent. As yields on Treasuries have come off recent highs, Japanese investors' net buying of overseas debt has slowed. Domestic buyers took in a net 233.2 billion yen ($2.37 billion) of foreign bonds in the week through July 27, the fourth straight week of net purchases, but net buying slumped from 601.4 billion yen in the previous week, capital flows data compiled by the Ministry of Finance showed.
TINY TAIL UNDERSCORES DEMAND Japan's Ministry of Finance offered 2.4 trillion yen ($24.40 billion) of 10-year bonds on Thursday, reopening the current issue with a coupon of 0.80 percent. The notes sold at a lowest price of 99.98, mostly in line with market expectations, and drew bids of 3.51 times the amount offered, up from the previous sale's bid-to-cover ratio of 2.41 times and the highest since the May sale. The tail between the average and lowest accepted prices, another gauge of demand, came in at a miniscule 0.02, matching last month's offering. A smaller number means stronger demand for the bonds. Market participants expect the Bank of Japan to conduct its purchasing operations as early as Friday, which likely supported demand at the sale. "Banks buy medium- and long-term bonds, banks sell medium- and long-term bonds to the BOJ. This is the pattern. These are the flows now," said a fixed-income fund manager at a Japanese trust bank in Tokyo. On the long-term supply front, Japan will try not to increase its government debt issuance over the next two years, according to a draft government report meant to be a roadmap for tackling the worst public debt problem in the industrial world. The draft report was described to Reuters by several people who have seen it.