JGB yield curve continues to flatten as 20-year action draws firm demand

By Junko Fujita

TOKYO, Feb 19 (Reuters) - Japan's government bond (JGB) yield curve maintained its flattening trend on Thursday, as foreign investors supported demand for a 20-year bond auction, the first after Prime Minister Sanae Takaichi's tax-cut pledge had sent its yield to record highs last month.

The 20-year debt auction drew firm demand as Takaichi's landslide election win on February 8 gave investors confidence that her government will not resort to a too-loose fiscal policy as some of the opposition parties had called for.

"The auction outcome was moderately firm and demand was led by foreign investors who can get extra yields by buying hedged JGBs," said Takashi Fujiwara, chief fund manager at Resona Asset Management's fixed income investment division.

The tender took place a month after a weak 20-year auction triggered a meltdown at the super-long-dated JGBs. On that day, Takaichi called a snap election and pledged to cut sales taxes on food, sending the 20-year bond yield nearly 20 basis points higher on concerns about the nation's strained finances.

Yields on super-long JGBs have been declining since the sweeping election victory by Takaichi's Liberal Democratic Party, while falls in shorter-dated yields have been contained in a days-long curve flattening trend.

"Market's worries about political instability have been removed after Takaichi's big win, while the finance ministry's reduction in issuance of super-long dated bonds has been a support for investor appetite," Fujiwara said.

Growing bets the Bank of Japan will hike interest rates earlier than expected have also limited declines in yields on shorter-dated bonds.

The 20-year JGB yield JP20YTN=JBTC fell 1.5 basis points (bps) to 2.955% on Thursday. The 30-year bond yield JP30YTN=JBTC fell 4 bps to 3.33%. The 40-year JGB yield JP40YTN=JBTC fell 3 bps to 3.575%.

Even before last month's market ructions, foreigners have been aggressively buying Japan's super-long-dated bonds after a huge selloff of those bonds last year made their prices cheap.

"That appetite continues as worries about fiscal expansion weakened," said Miki Den, a senior Japan rate strategist at SMBC Nikko Securities.

Meanwhile, the 5-year JGB yield JP5YTN=JBTC rose 1 bp to 1.63%, and the 10-year JGB yield JP10YTN=JBTC inched up 0.5 bp to 2.14%. The two-year bond yield JP2YTN=JBTC rose 0.5 bp to 1.24%.