JGBs extend gains on expectation of government measures to contain rising yields

By Junko Fujita

TOKYO, Jan 22 (Reuters) - Japan's super-long-dated government bonds extended gains on Thursday on expectation that the finance ministry could take some measures to contain further rises in yields.

The 20-year JGB yield JP20YTN=JBTC fell to a low of 3.175% and was last down 6.5 basis points (bps) at 3.19%. The 30-year JGB yield JP30YTN=JBTC slipped 5.5 bps to 3.655%.

Japanese bonds rebounded in the previous session from a rout after Finance Minister Satsuki Katayama called for calm in the markets, telling Bloomberg News that the government's fiscal policy was not expansionary.

"Katayama's comments raised expectations that the finance ministry may take some actions to ease the market concerns about rising yields," said Naoya Hasegawa, chief bond strategist at Okasan Securities.

Separately, expectation rose that the Bank of Japan could increase the amount of bonds it buys from the market at the regular bond-buying operations.

The central bank has been gradually reducing its bond purchases in an effort to reduce the balance sheet that had swelled from massive bond buying under former BOJ Governor Haruhiko Kuroda.

The BOJ should avoid increasing the amount of bond buying or slowing down the pace of reduction, as it could be interpreted as an action supporting government financing, Hasegawa said.

Yields on many JGB tenors surged to record highs on Tuesday after Takaichi pledged to eliminate sales taxes on groceries, fuelling concerns about the country's already precarious finances.

"We don't have any plans to make a permanent allocation away from U.S. and Japanese bonds," said Katie Dean, AustralianSuper's head of fixed income and currency.

"Recent market volatility in these fixed income markets is not unexpected given heightened geopolitical risks and fiscal policy uncertainty."

The yields fell sharply on Thursday due in part to thin liquidity, said Miki Den, a senior Japan rate strategist at SMBC Nikko Securities.

"The market still cannot bet on the curve flattening because it is afraid that the source of funds to reduce the taxes on food could be government bonds," he said.

The two-year JGB yield JP2YTN=JBTC, sensitive to the BOJ's policy, slipped 1 bp to 1.215%.