Japan's 2-Year Debt Completes Weekly Drop; Crisis Concerns Ease

By Theresa Barraclough

Sept. 20 (Bloomberg) -- Japan's two-year notes declined for a fourth week after the U.S. government proposed moving troubled assets from the balance sheets of American financial companies into a new institution.

The yields climbed to the highest in 2 1/2 months after the Nikkei 225 Stock Average advanced yesterday, reducing demand for debt. The Bank of Japan on Sept. 18 said it agreed with the U.S. Federal Reserve to supply dollars in Japan for the first time as part of a joint action by central banks worldwide to ease tensions in markets.

The measures ``might support financial markets and they may save some institutions,'' said Guthrie Williamson, portfolio manager in Sydney at Principal Global Investors, which manages $244.9 billion in assets globally. ``We could see bond yields rising for a few days.''

The yield on the 0.7 percent note due September 2010 rose 4.5 basis points this week to 0.785 percent in Tokyo at Japan Bond Trading Co., the nation's largest interdealer debt broker. The price fell 0.087 yen to 99.834 yen.

Two-year yields yesterday fell half a basis point to 0.785 percent after reaching 0.85 percent, the highest since July 9. A basis point is 0.01 percentage point.

Ten-year bond futures for December delivery dropped 0.33 this week to 137.02 at the Tokyo Stock Exchange. Japan's Nikkei 225 yesterday advanced 3.8 percent and the broader Topix index gained 4.7 percent.

The nation's bonds often move in the opposite direction to stocks. Benchmark 10-year yields had a correlation of 0.87 with the Nikkei 225 this month, according to Bloomberg data. A value of 1 means the two moved in lockstep.

Rescue Measures

Congressional leaders who met with Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson on Sept. 18 in Washington said they aim to pass legislation soon. The initiative, which may also insure money-market funds, is aimed at removing the devalued mortgage-linked assets at the root of the worst credit crisis since the Great Depression.

``The news of the U.S. government plan and the central bank's efforts to supply dollars have halted the deterioration of the credit crisis,'' reducing demand for bonds, said Akihiko Inoue, an analyst at Mizuho Investors Securities Co. in Tokyo.

The difference in yields between Japanese and U.S. five-year debt fell to 1.42 percentage points on Sept. 15, the narrowest since at least 1999, according to data compiled by Bloomberg. The spread was 1.66 percentage points yesterday and averaged about 3.19 percentage points last year.

``Banks are still short of capital,'' PGI's Williamson said. ``This will restrict credit growth and weigh on growth of the real economy for some time to come.''

Money Market Rate

The Fed on Sept. 18 increased the amount of dollars that the European Central Bank, the BOJ and other counterparts can offer from $67 billion ``to address the continued elevated pressures in U.S. dollar short-term funding markets.''

``The ongoing financial market turmoil resulting from U.S. financial-sector concerns has created some upward pressure on domestic money-market rates,'' Tomoko Fujii, head of Japan economics and strategy at Bank of America Corp. wrote in a research report on Sept. 18.

The BOJ added 2 trillion yen ($18.6 billion) to the financial system yesterday, its fourth day of fund injections to help ease a global credit crisis. Japan's overnight call loan rate was at 0.45 percent after the BOJ's operation yesterday at 9:05 a.m. in Tokyo, falling from as high as 0.585 percent, according to Tokyo Tanshi Co.

The decline in bonds was limited by speculation the worst of the financial crisis may not be over yet, boosting demand for the safe haven of government securities. Five-year yields fell 1.5 basis points yesterday to 1.11 percent.

`Like Aspirin'

``Bonds are the best buy,'' said Yuuki Sakurai, general manager of financial and investment planning in Tokyo at Fukoku Mutual Life Insurance Co., which manages the equivalent of $54 billion in assets. The recent rescue plans and money injections are ``like an aspirin for the market -- it takes away the headache, but it doesn't cure the problem.''

Benchmark bonds have handed investors a return of about 0.8 percent so far this quarter through Sept. 18, according to indexes compiled by Merrill Lynch & Co., which sold itself to Bank of America this week.

Demand for bonds also declined this week on speculation the suspension of Lehman Brothers Holdings Inc., which declared bankruptcy on Sept. 15, as a primary dealer of Japanese notes, reduced the appeal of the nation's sovereign debt.

Japan is considering ``various ways'' to cover Lehman's failure to pay for 128.7 billion yen of government debt sold to the company last month, according to the Ministry of Finance.

To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.