Japanese Bonds Post Biggest Weekly Gain Since 2004 on Rate Cut

By Theresa Barraclough

Dec. 20 (Bloomberg) -- Japanese bonds completed their biggest weekly gain since March 2004 after the central bank cut its benchmark interest rate and the Finance Ministry said it will sell less debt than primary dealers expect.

Ten-year yields fell to the lowest level since July 2005 yesterday after the Bank of Japan lowered its target for the overnight lending rate to 0.1 percent from 0.3 percent to help the ailing economy. The BOJ also said it would buy commercial paper to help companies gain access to funds, increasing the chance that lenders will invest in government debt

“The BOJ decided to buy commercial paper, increase bond purchases and cut interest rates,” said Keiko Onogi, a debt strategist in Tokyo at Daiwa Securities SMBC Co., one of the 24 primary dealers that are required to bid at government debt sales. “They did most of the things they could have done. It’s supportive for bonds.”

The yield on the 1.4 percent bond due December 2018 fell 17 basis points this week to 1.22 percent, according to Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price gained 1.515 yen this week to 101.602 yen. The yield fell as low as 1.21 percent yesterday.

Five-year yields declined 9.5 basis points this week to 0.75 percent. A basis point is 0.01 percentage point.

Ten-year bond futures for March delivery rose 0.26 this week to 139.68 at the Tokyo Stock Exchange. Japanese bonds have handed investors a return of 2.4 percent this year, according to indexes compiled by Merrill Lynch & Co.

Towards Zero

Bank of Japan Governor Masaaki Shirakawa and his colleagues voted 7 to 1 to cut rates, the central bank said in a statement yesterday. The second rate reduction in two months came after the Federal Reserve this week cut its target rate to as low as zero, driving the yen to a 13-year high against the dollar.

The BOJ also said it will raise its monthly government bond purchases from lenders, its main tool for adding funds into the banking system, to 1.4 trillion yen ($15.6 billion) from 1.2 trillion yen, the first increase since October 2002.

“We expect the BOJ will cut interest rates again down to zero before the end of March,” said Susumu Kato, chief economist in Tokyo at Calyon Securities, also a primary dealer. “Yields will stay lower on the back of expectations of a return to a zero interest rate.”

Too Rapid

The gain in 10-year bonds was limited yesterday as a technical chart traders use to predict yield changes suggested recent gains in the securities were too rapid. The 10-day relative strength index on 10-year yields declined to 28.5 on Dec. 18. A level below 30 suggests buying of the securities may have peaked.

Ten-year yields have fallen from an 11-month high of 1.895 percent on June 16 as the economy slipped into its first recession since 2001 due to the global credit crisis.

Japan may sell about 113 trillion yen of bonds next fiscal year, less than the forecast for 115 trillion yen by primary dealers, according to a Finance Ministry official who declined to be identified. The official said 33 trillion yen of the bonds would be used to pay for a shortfall in the budget for the year beginning April 1.

“Lower additional bond issuance” is supportive for bonds, said Eiji Dohke, chief strategist in Tokyo at UBS Securities Japan Ltd., a unit of Switzerland’s biggest bank.

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