August 12, 2015 / 4:22 AM / 2 years ago

JGB yields hit 3-mth low in wake of China's yuan devaluation

TOKYO, Aug 12 (Reuters) - The benchmark Japanese government bond yield fell to a three-month low on Wednesday as the debt market felt knock-on effects from China's devaluation of the yuan, including a surge in U.S. Treasury prices and falling share-prices in Japan.

The 10-year JGB yield declined 2.5 basis points to 0.37 percent, its lowest since early May. September 10-year futures touched a three-month high of 147.99.

Much of the impetus came from Treasuries, which saw its benchmark 10-year note yield extend its sharp decline overnight and fall to a three-month trough of 2.08 percent.

"The effect of China's devaluation of the yuan on JGBs is an indirect one and likely to be short-lived, as the overseas markets may be overreacting to the yuan's devaluation," said Katsutoshi Inadome, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.

"It will be a different story if China's economy really is as weak as some fear, but in the short term, much of the effect on JGBs will depend on how Treasuries and stocks fare. The long-term theme for the market remains BOJ's monetary policy," he said.

The Bank of Japan regularly buys large amounts of JGBs as part of its quantitative easing scheme, sucking up liquidity and driving debt yields to record lows earlier in the year.

The People's Bank of China (PBOC) surprised markets on Tuesday by aggressively lowering its guidance rate, pushing the yuan down nearly 2 percent in a bid to shore up exports.

After the PBOC lowered the yuan for a second day on Wednesday, deepening concerns about slowing growth in China, Tokyo's Nikkei fell. At 0416 GMT, it was down 1.7 percent. (Reporting by Shinichi Saoshiro; Editing by Richard Borsuk)

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