Japanese Bonds Complete Weekly Decline as Investors Raise Cash

By Theresa Barraclough

Oct. 11 (Bloomberg) -- Japanese government bonds completed a weekly decline on speculation investors raised cash as money- market rates climbed to the highest since March 1998.

The 10-year yield yesterday climbed to the highest in more than two months even as the Bank of Japan added 3 trillion yen ($30.3 billion) to the financial system, as coordinated interest-rate cuts by central banks failed to encourage lending. The Tokyo Stock Exchange yesterday temporarily halted trading in bond futures, citing excessive declines before resuming trading.

``It's very difficult for investors to be exposed to the financial markets,'' said Susumu Kato, chief economist in Tokyo at Calyon Securities, one of the 24 primary dealers required to bid at government debt sales. ``The BOJ continued to inject liquidity. However, it hasn't helped.''

The yield on the 1.5 percent bond due September 2018 rose 7.5 basis points this week to 1.52 percent in Tokyo at Japan Bond Trading Co., the nation's largest interdealer debt broker. The price fell 0.651 yen to 99.827 yen on the week. The yield yesterday reached 1.575 percent, the highest since July 28. A basis point is 0.01 percentage point.

Ten-year bond futures for December delivery lost 0.33 this week to 137.35 at the Tokyo Stock Exchange.

Tokyo's three-month interbank rate, or Tibor, increased to 0.878 percent yesterday, according to data compiled by Bloomberg. Japan's overnight call loan rate was at 0.7 percent after the central bank's liquidity injection yesterday, from 0.525 percent on Oct. 9, according to brokerage Tokyo Tanshi Co.

Japan's two-year notes yielded about 3 basis points less than Tibor yesterday, compared with an average of 12 basis points above last year, Bloomberg data shows. Two-year yields added 11.5 basis points this week to 0.845 percent.

Tougher Funding

``The funding environment is sending the two-year rate higher,'' said Tatsuo Ichikawa, a senior strategist in Tokyo at RBS Securities Japan Ltd., another primary dealer. ``Who would buy two-year JGBs below 80 basis points?''

Bond losses were limited yesterday as the Nikkei 225 Stock Average fell under 9,000 for the first time since June 2003 on concern the worst financial crisis since the Great Depression will trigger failures of companies beyond the financial sector.

``Equities look pretty bad, the economy will get worse, which makes it a bond-friendly environment,'' said Tokyo-based Keiko Onogi, a debt strategist at Daiwa Securities SMBC Co., another primary dealer. ``If you want to buy something, you should buy short and intermediate bonds.''

New City Residence, a Tokyo-based real estate investment trust, filed for bankruptcy with liabilities totaling 112.4 billion yen ($1.13 billion). Yamato Mutual Life Insurance Co. also sought protection from creditors yesterday, the Nikkei newspaper said on its online service.

G-7 Meeting

``The failure of the REIT and the fact that Yamato Mutual Life filed for protection is supportive for bonds,'' said Daisuke Uno, chief bond and currency strategist at Sumitomo Mitsui Banking Corp. in Tokyo.

The Nikkei 225 lost 9.6 percent yesterday to 8,276.43. Benchmark bonds have handed investors a return of 1.2 percent so far this year through Oct. 9, according to indexes compiled by Merrill Lynch & Co. The Nikkei has lost 40 percent in the period.

Group of Seven finance ministers and central bankers met in Washington to discuss financial turmoil that has wiped more than $8 trillion off the value of global stocks this month and led to rate cuts and bank bailouts in most of the member nations.

Japan's ruling party called on the U.S. to inject public funds into financial institutions as the credit crisis deepens.

Supply Concerns

Demand for bonds also declined this week on concern Japan's government will issue additional debt after the lower house on Oct. 8 approved a 1.8 trillion yen supplementary budget to fund a fiscal stimulus package.

``Since the economic outlook is gloomy and the tax revenue will decline,'' increasing debt is inevitable, said Takashi Nishimura, an analyst at Mitsubishi UFJ Securities Co., a unit of Japan's largest bank by assets, in Tokyo.

Issuing deficit-covering bonds and construction bonds may be ``unavoidable,'' Liberal Democratic Party Policy Chief Kosuke Hori told reporters in Tokyo on Oct. 9.

Japan already has 778 trillion yen of outstanding debt, which at 147 percent of gross domestic product is the largest among industrialized nations.

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