Japan 5-Year Notes Complete 2nd Weekly Drop on Supply Concerns

By Theresa Barraclough

Dec. 6 (Bloomberg) -- Japanese five-year government notes completed a second weekly drop on concern the Ministry of Finance will increase debt sales next year to fund economic- stimulus spending.

Five-year yields yesterday climbed from near the lowest since April after the Nikkei newspaper said bond sales may exceed the government’s 30 trillion yen ($325 billion) ceiling for the year ending March 31. The Tokyo interbank offered rate for yen loans, known as Tibor, increased for a 20th day yesterday, adding to speculation higher costs will deter investors from borrowing to buy debt.

“Investors are very aware of next year’s issuance plan so bonds tend to be weak this time of year,” said Takashi Nishimura, an analyst in Tokyo at Mitsubishi UFJ Securities Co., a unit of Japan’s largest bank by assets. “Tibor is one of the hurdles for the JGB market.”

The yield on the 1 percent note due September 2013 rose one basis point this week to 0.88 percent in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price declined 0.048 yen to 100.550 yen. A basis point is 0.01 percentage point.

Ten-year bond futures for December delivery declined 0.25 this week to 139.13 as of the afternoon close on the Tokyo Stock Exchange yesterday.

Tibor increased to 0.899 percent yesterday, from 0.876 on Nov. 28, according to data compiled by Bloomberg. That’s the highest since March 1998.

Lower Revenue

The government may lower its estimate for this fiscal year’s tax revenue by 6.5 trillion yen because of a decline in corporate earnings, the Nikkei newspaper said yesterday, citing an unidentified official.

The Ministry of Finance said Dec. 3 it may increase sales of short- and mid-term government debt, reiterating comments it make last month.

“Fears of a loosening of fiscal policy will probably limit the room for JGB yields to decline, despite growing deflation expectations,” Tomoko Fujii, Tokyo-based head of Japan economics and strategy at Bank of America Corp., wrote in a report on Dec. 4.

Ten-year bonds yesterday completed a fourth week of gains before a central bank report next week economists estimate will show wholesale inflation slowed last month. Yields fell 2.5 basis points this week.

Inflation-linked bonds worldwide are yielding more than conventional debt, signaling investors expect deflation, or a decline in consumer prices.

Producer Prices

The extra yield 10-year conventional Japanese bonds offer over similar-maturity inflation-linked debt, known as the breakeven rate, was minus 259 basis points yesterday, according to data compiled by Bloomberg. The U.S. five-year breakeven rate was minus 39 basis points and the three-year U.K. breakeven spread was minus 197 basis points on Dec. 4.

Producer prices, the costs companies pay for energy and raw materials, may have increased 2.8 percent in November from a year earlier, down from a 4.8 percent gain in October, according to a Bloomberg News survey of economists. The Bank of Japan report is due Dec. 10.

There was a 25 percent chance yesterday the central bank will cut interest rates by the end of March, according to calculations by JPMorgan Chase & Co. using overnight interest- rate swaps. The BOJ’s target rate is 0.30 percent.

The central bank on Dec. 2 said it will start corporate debt rated BBB or higher as collateral from commercial banks on Dec. 9 to encourage them to lend more to companies.

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