Japanese bonds set for biggest drop since May 2013

[TOKYO] Japan's 10-year government bonds headed for their biggest drop since May 2013 as investors offloaded the securities in case the European Central Bank (ECB) disappoints the market with its announcement today on monetary policy.

Twenty-year debt slid, pushing yields to the highest level in more than three weeks, after demand at an auction of the securities fell to its weakest since November. The Bank of Japan (BoJ) yesterday refrained from adding to a record bond-buying programme, retaining its plan to increase the monetary base at an annual pace of 80 trillion yen (S$903 billion).

"Such events as the 20-year JGB auction and the BoJ meeting are over and market players wanted to book profits ahead of the ECB meeting," said Naomi Muguruma, a Tokyo-based economist at Mitsubishi UFJ Morgan Stanley Securities Co. "Markets have already priced in the ECB's bond buying to such an extent that there was risk that the outcome will disappoint, so that led to the pre-emptive move of scaling back positions."

The yield on the benchmark 10-year bond climbed seven basis points to 0.315 per cent as of 3:40pm in Tokyo from yesterday, according to Japan Bond Trading Co, the nation's largest inter-dealer debt broker. The price of the 0.3 per cent debt due December 2024 fell 0.675 yen to 99.856.

The 20-year yield surged 17 basis points to 1.065 per cent, set for the highest close since Dec 29. The 30-year yield jumped 181/2 basis points to 1.29 per cent, a level unseen since Dec 22. A basis point is 0.01 percentage point.

ECB policymakers led by Mario Draghi will propose purchasing 50 billion euros (S$77 billion) in assets each month through 2016, two central-bank officials told Bloomberg News.

An index of Japanese sovereign debt reached the highest in data going back to January 2010 on Jan 19, according to Bloomberg Japan Sovereign Bond Index. The gauge has risen 0.7 per cent this month.

BLOOMBERG