MNI INSIGHT: BOJ Sees No Need To Curb JGB Ylds; US Tsys Eyed

By Hiroshi Inoue

     TOKYO (MNI) - Bank of Japan officials see no imminent need to curb a rise

in Japanese government bond yields as the pace of gain remains modest and upside

pressure on bond yields may be eased by short-covering as the yen rises, MNI

understands.

     The BOJ view is underscored by its decision Wednesday to leave the scale of

its purchase of JGBs in the 5 to 10 year bucket at Y450 billion, unchanged from

the scale of the previous comparable operation on Oct 3.

     With no significant domestic factors seen pushing JGB yields sharply

higher, BOJ officials are continuing to pay close attention to developments in

U.S. Treasury bond market, where the outlook for yields remains uncertain.

     On Tuesday, the U.S. 10-year bond yield closed at around 3.20%, after

rising to 3.261% for the highest level since May 2011. The 10-year JGBs traded

at 0.150% in Wednesday, down 0.5 basis point from Tuesday's close of 0.155%.

     --BAND STILL A GUIDE

     The hope is JGB yields move flexibly, reflecting economic developments and

price conditions as well as UST moves, but this doesn't mean the BOJ will allow

the 10-year bond yield to rise above +0.2% or fall below -0.2%. The BOJ could

take quick action to curb higher bond yields, such as a fixed-rate bond buying

operation, if the rise in the 10-year JGB yield was judged as too rapid and

looked like breaking above +0.2%, the upper end of the BOJ's acceptable range.

     However, as we noted Friday, if the pace of rise in the 10-year bond yield

deemed appropriate, the BOJ would examine whether the 10-year bond yield could

push above 0.2% and higher or how they should deal with higher yields.

     According to officials, the rise in JGB yields triggered by higher UST

yields is being eased by some short-covering in the bond market as the yen rises

in part on the back of the International Monetary Fund's decision to lower its

growth forecast of global economy in 2018 and 2019.

     --AUCTIONS, BUYBACKS AHEAD

     Looking ahead, the results of Thursday's 30-year JGB auction will be

closely watched to gauge investors' demand for the new super-long bonds amid

concern the BOJ may reduce the scale of bond buying at the long end of the

curve.

     On Friday, the BOJ plans to conduct outright bond buying operations in the

1 to 3 years and 3 to 5 years, 10 to 25 years and more than 25 years buckets.

     The BOJ is looking for a chance to lower the scale of its purchase of

super-long bonds, if market conditions warrant, as supply-demand conditions at

the longer-end of the curve remain tight.

     On Sep 21, the BOJ reduced the scale of bond buying in the 25 years plus

bucket to Y50 billion from Y60 billion.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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