Japan Bonds Complete Weekly Decline on Supply Concerns, Stocks

By Theresa Barraclough

Nov. 8 (Bloomberg) -- Japan's 10-year bonds completed a weekly decline on concern the government will sell more debt as it initiates policies to boost economic growth.

Ten-year yields this week climbed to the highest since Oct. 28 as the Nikkei 225 Stock Average advanced, encouraging some investors to sell debt and purchase equities. The Ministry of Finance yesterday sold 40-year debt for only the third time since the securities were first issued last November.

Yields are likely to rise as ``fiscal policies, which will have to be implemented globally in order to sustain the banking sectors, are going to heavily affect the demand and supply in government bonds,'' said Alessio Caldarera, a fixed-income strategist at BNP Paribas Securities Japan Ltd. in Tokyo.

The yield on the 1.5 percent bond due September 2018 rose 3 basis points this week to 1.51 percent in Tokyo at Japan Bond Trading Co., the nation's largest interdealer debt broker. The price fell 0.258 yen to 99.914 yen on the week.

Five-year yields increased 5 basis points this week to 0.915. Ten-year bond futures for December delivery lost 0.58 this week to 137.40 at the Tokyo Stock Exchange. A basis point is 0.01 percentage point.

Parliament approved a 1.8 trillion yen ($18.5 billion) supplementary budget as part of a stimulus package on Oct. 16. Japan's Prime Minister Taro Aso on Oct. 30 promised to pump an additional 5 trillion yen into the economy.

Curve Steepens

Yields on longer-maturity notes may rise, steepening the so-called yield curve, Caldarera said. The curve plots the rates on bonds across the spectrum of various maturities. Twenty-year yields added 3.5 basis points this week to 2.155 percent.

The difference in yields between five- and 20-year bonds yesterday held near the widest in almost seven months. The spread was 1.23 percentage points yesterday, compared with 1.28 percentage points on Nov. 4, the most since April.

The Ministry of Finance yesterday sold 200 billion yen of the 40-year bonds with a coupon of 2.4 percent. The sale drew bids for 2.78 times the amount on offer, compared with a so- called bid-to-cover ratio of 4.55 times at the previous auction in May. The highest yield at the auction was 2.445 percent, lower than the 2.50 percent forecast in a Bloomberg News survey.

Solid Demand

The auction proves ``there is solid demand, but from limited investors as the highest yield was lower than expectations,'' said Takashi Nishimura, a Tokyo-based analyst at Mitsubishi UFJ Securities Co., a unit of Japan's largest bank by assets.

The yield on the current benchmark with the same coupon fell 1.5 basis points yesterday to 2.465 percent, the first time the security was traded since Oct. 27.

The decline in bonds was tempered after the International Monetary Fund on Nov. 6 predicted the first simultaneous recessions in the U.S., Japan and Europe in the post-World War II era.

``Markets have entered a vicious cycle of asset de- leveraging, price declines and investor redemptions,'' the IMF said in an update to its World Economic Outlook report, released in Washington. ``Global action to support financial markets and provide further fiscal stimulus and monetary easing can help limit the decline in world growth.''

Shrinking Economy

Japan's economy shrank 0.4 percent in the third quarter, a second consecutive negative reading, according to Bank of America Corp. The economy contracted an annualized 3 percent in the three months ended June 30, the Cabinet Office said Sept. 12.

``There should be room for JGB yields to decline,'' Tomoko Fujii, head of Japan economics and strategy at Bank of America Corp., wrote in a report on Nov. 6. Ten-year yields will probably drop to as low as 1.2 percent in the next few months, she said.

The Nikkei 225 yesterday fell 3.6 percent, lowering its weekly advance to 0.07 percent. Japan's bonds often move in the opposite direction to stocks. Benchmark 10-year yields had a correlation of 0.99 with the Nikkei this month, according to data compiled by Bloomberg. A value of 1 means the two moved in lockstep.

``The market is sensitive to stock movements,'' Mitsubishi UFJ's Nishimura.

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