JGB yields fall as investors adjust positions after heavy selloff

By Junko Fujita

TOKYO, Jan 30 (Reuters) - Yields on Japanese government bonds (JGB) fell on Friday, as investors adjusted their positions after a selloff earlier this month, while a firm auction supported sentiment.

The benchmark 10-year JGB yield JP10YTN=JBTC fell 2 basis points (bps) to 2.230%.

"Some investors bought back JGBs to cover their short positions after a heavy sell-off this month," said Kentaro Hatono, head of global fixed income at Asset Management One.

Yields surged mid-January after Prime Minister Sanae Takaichi called a snap election and pledged to cut sales taxes on food, raising fears of worsening fiscal conditions.

The JGBs held their ground on Friday, even as long-dated U.S. Treasuries were sold in Asia on speculation that President Donald Trump would nominate former Federal Reserve Governor Kevin Warsh to head the U.S. central bank.

Yields move inversely to bond prices.

"The market just unwound their positions for Rick Rieder, who would flatten the curve," Hatono said.

"Instead, the market bet on curve steepening as Warsh would tighten the Fed's balance sheet."

The two-year yield JP2YTN=JBTC fell 2.5 bps to 1.225% after the auction for the bonds with the same maturity received firm demand.

The strong outcome of the auction reflected the market view that the current level of the two-year bond yield already priced in the Bank of Japan's terminal rate, said Miki Den, a senior Japan rate strategist at SMBC Nikko Securities.

His firm expectds the BOJ is to raise rates three more times until the policy rate reaches a terminal rate of 1.5% in the summer of 2028, said Den.

The 40-year bond auction held earlier this week also saw a stronger-than-expected outcome.

The yield on the 40-year JGB JP40YTN=JBTC inched up 0.5 bp to 3.87%.

The 20-year JGB yield JP20YTN=JBTC slid 1.5 bps to 3.145%. The 30-year yield JP30YTN=JBTC fell 1.5 bps to 3.605%.