Japanese 10-Year Bonds Complete 2nd Weekly Slide on Stock Gain

By Theresa Barraclough

Oct. 18 (Bloomberg) -- Japanese 10-year government bonds completed a second week of losses after U.S. and European rescue plans for finance companies bolstered global stock markets.

Ten-year yields yesterday held near a 2 1/2-month high after Ambac Financial Group Inc., the second-largest U.S. bond guarantor, on Oct. 16 said it will present a rescue plan to the Treasury Department. Demand for longer-dated bonds also fell on concern the Japanese government will issue additional debt to help pay for economic stimulus packages.

``Nobody wants to buy,'' said Yuuki Sakurai, a general financial-planning manager at Fukoku Mutual Life Insurance Co. in Tokyo, which manages the equivalent of $54 billion in assets. ``The bond market will remain in a nervous situation.''

The yield on the 1.5 percent bond due September 2018 gained 5.5 basis points this week to 1.575 percent in Tokyo at Japan Bond Trading Co., the nation's largest interdealer debt broker. The yield reached 1.63 percent on Oct. 14, the highest since July 24. Twenty-year yields added 16 basis points this week to 2.145 percent. A basis point is 0.01 percentage point.

Ten-year bond futures for December delivery lost 1.60 to 135.75 this week at the Tokyo Stock Exchange. The Nikkei 225 Stock Average advanced 2.8 percent yesterday.

Benchmark bonds have handed investors a loss of about 0.4 percent this week through Oct. 16, according to indexes compiled by Merrill Lynch & Co. The Nikkei has gained 2 percent in the same period.

Cheaper Funding Costs

Demand for shorter-dated notes increased as 32 trillion yen ($315 billion) in BOJ injections over the past month helped keep benchmark rates near the central bank's target of 0.5 percent.

Japan's overnight call loan rate traded at 0.51 percent yesterday, from 0.49 percent on Oct. 16, according to Tokyo Tanshi Co. The London interbank offered rate, or Libor, that banks charge each other for three-month yen loans dropped 2 basis points to 1.064 percent on Oct. 16, the biggest drop since March 28, according to the British Bankers' Association.

The difference between the Tokyo repo rate and the two-year yield increased to about 25 basis points on Oct. 14, from zero a week earlier, according to data compiled by Bloomberg News.

``Now that the money market rate is under two-year yields, investors want to buy,'' said Takashi Nishimura, an analyst at Mitsubishi UFJ Securities Co., a unit of Japan's largest bank by assets, in Tokyo. ``The bond market is reflecting the improved stability of the money market. Investors feel more secure about making investment decisions.''

`Negative Effects'

The drop in bonds was limited after Bank of Japan Governor Masaaki Shirakawa yesterday said policy makers need to be on guard about rising ``downside risks'' for Japan, adding that a significant global slowdown may hurt the already slowing economy.

``We're concerned that Japan will face negative effects should the overall global economy deteriorate significantly,'' Shirakawa said in a speech at an annual meeting of Japanese credit cooperatives in Tokyo. Japan's economic growth will remain ``sluggish for the time being,'' he said.

There was a 20 percent chance yesterday the central bank will reduce borrowing costs to 0.25 percent from 0.5 percent by Dec. 31, according to Bloomberg calculations using JPMorgan Chase & Co. overnight interest-rate swaps.

Bond Issuance

Japan's Economic and Fiscal Policy Minister Kaoru Yosano yesterday said ``theoretically'' it would be acceptable for the government to issue new debt to make up for a decline in tax revenue. Yosano on Oct. 16 said the government aims to compile an economic stimulus package by the end of the month to support households facing plunging stock values.

The package will be the second since the government drafted measures in August to help consumers and small companies cope with rising energy costs. The opposition-controlled upper house on Oct. 16 passed a 1.8 trillion yen supplementary budget to fund the first plan.

``Given the government will increase spending, there's steepening curve pressures,'' said Tomohiko Katsu, deputy general manager of the capital market division at Shinsei Bank Ltd. in Tokyo. ``So it's a risk investment,'' buying longer- maturity bonds, he said.

The difference in yields between 2- and 20-year debt expanded to 1.36 percentage points yesterday, the widest in over a week, according to data compiled by Bloomberg.

Japan this week released measures to stabilize financial markets including easing restrictions on company buybacks and halting sales of state-owned shares.

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