Benchmark 10-year bonds lead JGBs lower on shift in BOJ support

By Junko Fujita and Rocky Swift

TOKYO, June 17 (Reuters) - Benchmark 10-year notes led Japanese government bonds lower on Tuesday after a debt purchase plan by the Bank of Japan indicated reduced support for shorter-dated securities.

The 10-year JGB yield JP10YTN=JBTC rose 2.5 basis points (bps) to 1.475% after touching 1.485%, its highest level since June 4. Futures on the debt 2JGBv1 fell to their lowest levels since April.

Yields move inversely to prices.

For the July–September quarter, the BOJ said it will reduce purchases of shorter-dated JGBs while retaining its buying of debt with maturities longer than 10 years.

Beginning next April, the BOJ will reduce its monthly bond purchases by 200 billion yen ($1.38 billion) each quarter, it said following a two-day policy meeting. The move will mark a slower taper than the current pace of 400 billion yen reductions implemented quarterly.

"A reduction of bond buying amounts for maturities up to 10 years suggests that the BOJ wants the market to decide the yields," said Miki Den, a senior Japan rate strategist at SMBC Nikko Securities. "While for the super-long bonds, the BOJ kept the purchase amount the same to respond to the balance of supply and demand."

The five-year yield JP5YTN=JBTC rose 2 bps to 1.03%. The 20-year JGB yield JP20YTN=JBTC increased 2 bps to 2.4%.

The BOJ began tapering its massive bond purchases last year in a bid to wean the economy off decades of heavy stimulus, known as quantitative easing (QE).

Meanwhile, demand for long-dated debt among life insurers and other traditional buyers has fallen off. And investors have grown wary of Japan's fiscal outlook, as some lawmakers advocate for increased stimulus ahead of an election slated for July.

A slowdown in tapering effectively offers support to the JGB market, which has been shaken by weak demand at recent auctions and a surge in super-long yields to record levels last month.

"It appears that the bank is prioritising market stability during the process of normalizing its balance sheet," said Norihiro Yamaguchi, senior Japan economist at Oxford Economics.

"QE is likely to continue to be an essential policy tool, given that the JGB market could become more fragile amid heightened fiscal concerns and changes in the market structure," he added.

Meanwhile, the Ministry of Finance is expected to reduce its issuance of longer-dated bonds to support demand for the securities. That would be counterbalanced by increased sales of shorter-dated notes.

In another tweak to its JGB policy, the central bank decided to allow investors to keep more varieties of 10-year notes they borrow through its lending facility. The measure is expected to improve liquidity in the market and speed up the BOJ's divestiture of bonds.

Japan's longest tenors sold off in the afternoon session, though yields remain far lower than levels reached last month.

The 30-year yield JP30YTN=JBTC rose 3 bps to 2.935%, while the 40-year yield JP40YTN=JBTC rose 3 bps to 3.085%.

The slowdown in quantitative tightening (QT) contributes to the stability of super-long bonds, but uncertainty remains about the program beyond March 2027, said Koichi Fujishiro, chief economist at Dai-Ichi Life Research Institute.

"There had been speculation that the BOJ might reduce its monthly purchases to slightly above 2 trillion yen and halt QT at that level," he said. "From this perspective, today's announcement was viewed as somewhat hawkish."

($1 = 144.7600 yen)