JGBs fall on profit-taking before EU events, 30-year sale

Japanese government bonds fell on Wednesday on profit-taking ahead of a European leaders' summit on the debt crisis this week, while hedge selling weighed down longer maturities before a 30-year JGB auction on Thursday.

Market players said downside pressure increased during afternoon trading as the rollover among JGB futures contracts progressed and made it easier for players to take short positions.

December 10-year futures inched down 0.04 point to 142.13. March futures, which will become the benchmark contract by Monday at the latest as trading in the December contract will end on Friday, fell 0.11 point to 141.60.

"Because JGB prices have risen recently, some investors decided to take profits before upcoming events in the euro zone," said a fund manager at a US asset management firm.

The 10-year cash bond yield inched up 0.5 basis point to 1.045 per cent, but stayed below a four-month peak of 1.090 per cent.

The yield curve bear-steepened as superlongs were weaker than other maturities, with broker hedging and position squaring from investors weighing ahead of the ¥700 billion ($9bn) 30-year JGB auction on Thursday, market players said.

The 20-year yield was up 1.5 basis points at 1.780 per cent and the 30-year yield climbed 2 basis points to 1.970 per cent.

The 20- and 30-year yield spread rose to a three-week high of 19.5 basis points, off a three-month low of 16 basis points hit late November.

The auction is expected to be supported by demand from investors such as life insurers, the main players in the maturity. But some dealers may limit their participation ahead of the EU summit on Friday, and as the maturity offers less attractive value compared with other maturities, market players said.

"Investors are not sure how they can reflect the European situation in their portfolios at this point, and it is not the best timing to have an auction of bonds with a long duration. But the new debt should be digested smoothly with demand from investors," said Shogo Fujita, chief Japan bond strategist at Bank of America Merrill Lynch.

"People are re-examining if JGBs should be sold based on contagion risks because if they are, there won't be too many places left to put money," he added.

Money market rates remained stable, with the overnight call rate flat at 0.07 per cent.

Standard & Poor's, which on Monday told 15 euro zone member nations that it may cut their debt ratings, followed with a second warning on Tuesday that it may cut the credit rating of Europe's financial rescue fund.

The Financial Times reported that European leaders would discuss boosting the firepower of the bailout fund at Friday's summit.

The European Central Bank also meets on Thursday and is expected to cut interest rates and offer ultra-long liquidity operations to support banks.