Japan's Bonds Complete Best Week Since June on Stocks Rout

By Theresa Barraclough

Oct. 25 (Bloomberg) -- Japan's 10-year bonds yesterday capped the biggest weekly gain since June as investors sought to preserve their capital amid a global stocks rout that wiped out more than $10 trillion of market value this month.

The securities yesterday climbed for a fourth day after Sony Corp. cut its annual earnings target by more than half, sending the Nikkei 225 Stock Average down to the brink of 1982 levels. Demand for shorter-maturity debt increased on mounting speculation the Bank of Japan will lower interest rates this year to prevent a prolonged recession.

``JGBs are relatively attractive,'' said Eiji Dohke, chief strategist at UBS Securities Japan Ltd. in Tokyo. ``The decline in corporate-sector performance will weigh on domestic stocks.''

The yield on the 1.5 percent bond due September 2018 fell 9 basis points this week to 1.48 percent in Tokyo at Japan Bond Trading Co., the nation's largest interdealer debt broker. The price rose 0.773 yen on the week to 100.172 yen. A basis point is 0.01 percentage point.

Five-year yields declined 11.5 basis points since last week to 1.025 percent. Ten-year bond futures for December delivery gained 1.95 to 137.70 as of the afternoon close at the Tokyo Stock Exchange yesterday.

Sony, the world's second-biggest maker of consumer electronics, on Oct. 23 slashed its forecast for annual operating profit by 57 percent, citing the stronger yen and worsening market conditions for televisions and digital cameras.

The yen has climbed 13 percent against the dollar over the past three months, the sole gainer among the 16 most-actively traded currencies. The Nikkei yesterday dropped below 8,000 for the first time since May 2003, finishing at 7,649.08 in Tokyo, just 41 points shy of the lowest close since 1982.

Stock Losses

Japan's bonds often move in the opposite direction to stocks. Benchmark 10-year yields had a correlation of 0.97 with the Nikkei 225 this week, according to data compiled by Bloomberg. A value of 1 means the two moved in lockstep.

The gain in longer-dated bonds was limited on speculation the government will issue debt to finance an economic stimulus package, according to Principal Global Investors. Twenty-year yields increased 3 basis points this week to 2.175 percent.

``People are staying away from the long end,'' said Guthrie Williamson, portfolio manager in Sydney at PGI, which manages $244.9 billion in assets globally. ``The absorption will drive the market in the short term.''

The government will compile a second economic stimulus package by the end of the month, having drafted a 2 trillion yen ($20.8 billion) plan in August. Finance Minister Shoichi Nakagawa said on Oct. 21 that selling bonds to pay for an additional package remains an option.

Rate-Cut Odds

There was a 26 percent chance yesterday the Bank of Japan will lower its benchmark rate to 0.25 percent from 0.5 percent by year-end, up from 3 percent odds a month ago, according to calculations by JPMorgan Chase & Co. using overnight interest- rate swaps.

``With the yen advancing and stocks falling, concerns about Japan's financial system and economy are mounting,'' said Jun Fukashiro, senior fund manager at Toyota Asset Management Co. in Tokyo. ``A rate cut seems unavoidable.''

The government this week acknowledged Japan has probably entered its first recession in six years after the economy shrank in the second quarter and factory output, machine orders and household spending fell in August.

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