JGBs Slip; Little Support from Well-Received Auction

By Shinichi Saoshiro

TOKYO, Nov 11 (Reuters) - Japanese government bonds slipped on Thursday, with a well-received five-year auction unable to stop the benchmark yield from rising to a seven-week high as resurgent Tokyo stocks kept debt buyers on the back foot.

The new five-year JGBs attracted steady demand from domestic financial institutions looking for a place to park their surplus funds under the Bank of Japan's near zero rate policy, market players said.

But as with the 10-year offering last week and the 40-year auction earlier this week, Thursday's 2.4 trillion yen ($29 billion) five-year sale failed to spark a market bounce.

"A pattern is developing in which each auction attracts good demand but the market keeps declining regardless," said Akito Fukunaga, chief rates strategist at RBS Securities in Tokyo.

"Expectations placed on the Federal Reserve's quantitative easing turned out to be excessive and some sellers are looking to unwind longs at each opportunity. This could continue until Treasuries bounce convincingly."

The benchmark 10-year yield JP10YTN=JBTC climbed 1.5 basis point to 1.005 percent, its highest in seven weeks, with unwinding of flattening trades seen to have nudged it higher.

The 1.000 percent threshold was previously considered a firm support level.

But with Tokyo's Nikkei .N225 advancing to a 4-½ month high following a boost in risk appetite after the Fed's easing and a pullback by the yen against the dollar, 1.000 percent may become a mere passing point, forcing analysts to redraw their line of expected support at a level like 1.200 percent.

The yield curve resumed steepening as midterm yields were pinned down following the steady five-year auction but those of longer-dated maturities rose.

GOOD AUCTION

The bid-to-cover ratio, a gauge of demand, at the five-year tender rose to 3.93 from 3.53 at the previous sale in October. This was significantly higher than 3.52, the average ratio from the past 12 sales.

"The auction results were good, coming with a tighter tail, high bid-to-cover ratio and a lowest price slightly above forecasts," said Katsutoshi Inadome, a fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities.

"The outcome can be attributed to the rise in yields prior to the auction, which added to underlying demand from investors looking to park their excess money. The good result, however, may not be enough to send the market into a sustained uptrend."

The 10-year/20-year yield spread widened to 88.5 basis points, edging back towards a 2-½ year high of 89.5 basis points hit last month.

Investors unwinding flattening trades built before the five-year sale that involved selling of midterm JGBs and buying superlong bonds pushed superlong yields higher, market players said, with sentiment also dampened following the previous day's lacklustre U.S. Treasury 30-year auction.

The 20-year yield JP20YTN=JBTC climbed 3.5 basis points to 1.890 percent, a two-month high, with early selling by some participants making room for next week's 20-year sale seen exacerbating the rise.

The five-year yield JP5YTN=JBTC was unchanged at 0.350 percent, matching a two-month high hit the previous day.

December 10-year futures 2JGBv1 declined 0.10 point to 142.42.

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