TOKYO, July 22 (Reuters) – Japanese government bonds rallied on Friday, with the benchmark 10-year yield hitting its lowest in seven years, after testimony by Fed Chairman Ben Bernanke suggested low interest rates would remain in place for a long time.
Bonds were given a further boost after a sale of 20-year debt attracted strong demand.
The 10-year yield JP10YTN=JBTC dropped 3 basis points to 1.055 percent after brushing 1.045 percent, its lowest since August 2003.
September 10-year futures 2JGBv1 climbed 0.17 point to 141.87 after hitting 142.08, their highest in seven years.
“Bernanke’s testimony represented a new chapter for the bond market, as it suggested the Fed is bracing for tougher economic conditions than it anticipated,” said a fund manager at a domestic investment firm.
“Any resulting easing by the Fed would come at a time when central banks in Europe and Japan are strengthening their easing rhetoric. This will add to flattening pressure on the yield curve, possibly taking the (JGB) 10-year yield below 1 percent.”
Bernanke, delivering the Fed’s semiannual report to Congress on monetary policy on Wednesday, said the economy faced “unusually uncertain” prospects and the Fed was ready to take further steps to bolster growth if needed, but also that policy makers believed the economy was still on a path to recovery. [ID:nWALLIE6DU]
The Fed chairman’s testimony helped boost demand for the 1.1 trillion yen ($12.6 billion) of 20-year JGBs sold on Thursday, market players said.
The usual rules of engagement were reversed on Thursday as dealers bought superlong bonds ahead of the auction — instead of selling to hedge their positions as they usually do — to stock their inventories in anticipation of strong post-auction demand.
The auction’s bid-to-cover ratio, a gauge of demand, fell to 4.46 from a record high 4.60 at the previous offering in June, although this was still much higher than 3.31, the average from the past 12 sales. [ID:nMOFGV5002] TENDER01
The robust auction outcome reflected the wider variety of investors getting involved in superlong maturities, said Keiko Onogi, a senior JGB strategist at Daiwa Securities Capital Markets.
“The relatively low coupon didn’t appear to dampen demand from buyers getting involved in the superlongs for trading purposes. These investors represent a change in demographics, joining the traditional buy-and-hold investors of superlongs.”
The 1.8 percent coupon on the new 20-years was the lowest in six years.
Superlongs have long been the domain of buy-and-hold investors like life insurers, but recent data has pointed to a growing presence of investors like regional banks, “shinkin” co-op banks and agricultural institutions.
Bond investors such as domestic banks have been putting more money to work in superlongs recently to boost returns as yields at the shorter end have fallen to multi-year lows.
Superlongs also present investors with opportunities for potential capital gains due to increased volatility, traders said.
On a monthly basis, Japan’s benchmark 10-year yield has been declining since April, tugged lower by factors including Europe’s sovereign debt crisis, prospects of a global economic slowdown and hopes for fiscal austerity at home.
While the influence of the debt crisis and fiscal austerity hopes have receded, prospects of an economic slowdown have been kept alive following a string of downbeat indicators from the United States.
Market focus has recently shifted to the Federal Reserve and whether it will maintain a low rate policy longer than expected.
The 20-year yield JP20YTN=JBTC declined 4 basis points to 1.765 percent and the 30-year yield JP30YTN=JBTC also dropped 4 basis points, to 1.830 percent.
The five-year/20-year yield spread tightened by 3 basis points to 143.5 basis points. It has tightened by about 14 basis points over the past month. (Editing by Joseph Radford)