Japan’s Bonds Complete Worst Month Since May on Supply Outlook

By Yasuhiko Seki and Nate Hosoda

Jan. 31 (Bloomberg) -- Japan’s 10-year bonds completed their worst month since May on concern the government will increase debt sales as it seeks to spend its way out of the deepest recession in the postwar period.

Benchmark yields extended this month’s advance to 12 basis points as government reports yesterday showed factory output slumped a record 9.6 percent in December, unemployment surged the most in 41 years and households cut spending for a 10th month. The Ministry of Finance may need to sell a record 38.1 trillion yen ($426 billion) of new bonds in the fiscal year starting April 2011, official calculations show.

“As governments across the globe scramble to address the deepening recession, the market is shifting its attention to the supply problem,” said Ryutaro Matsuyama, a strategist in Tokyo at Mizuho Investors Securities Ltd., the brokerage arm of Japan’s second-largest banking group. “The market has already priced in an acceleration of the economic slump.”

The yield on the 1.3 percent bond due in December 2018 touched a three-week high of 1.29 percent yesterday in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. A basis point is 0.01 percentage point.

Ten-year bond futures for March delivery fell 0.90 to 138.91 during the week in Tokyo, the biggest slump since the five days ended Jan. 9.

Production Slides

Japan’s drop in production eclipsed the previous record of 8.5 percent set only a month earlier, the Trade Ministry said yesterday in Tokyo. The jobless rate climbed to 4.4 percent from 3.9 percent and household spending slid 4.6 percent.

Bond declines were limited after a statistics bureau report yesterday showed consumer prices excluding fresh food rose 0.2 percent from a year earlier in December, less than the previous month’s 1 percent increase. Slower inflation helps preserve the purchasing power of fixed-income securities.

“If Japan’s economy falls into a deflationary spiral, I wouldn’t be surprised if the 10-year yield falls below 1 percent,” said Takeshi Minami, chief economist in Tokyo at Norinchukin Research Institute. The “data suggest the economy is now on the verge of returning back to deflation.”

Demand for Japanese debt weakened after yields on 10-year Treasuries on Jan. 29 rose the most since Nov. 21, after the U.S. government sold a record $30 billion of five-year notes at a higher yield than analysts forecast, indicating weak demand.

Supply Concerns

The auction results may signal investors will have trouble absorbing debt issued to pay for a $1 trillion U.S. budget deficit and programs to spur growth. The U.S. will probably borrow a record $2.5 trillion this fiscal year ending Sept. 30, versus $892 billion in notes and bonds sold in the prior 12 months, according to Goldman Sachs Group Inc.

“The supply concerns are more pronounced in the U.S. and Europe than in Japan,” said Akitsugu Bandou, a senior economist at Okasan Securities in Tokyo.

The Ministry of Finance will sell 1.9 trillion yen of 10- year securities bearing a coupon of 1.3 percent on Feb. 3. The prior sale on Jan. 8 drew bids for 2.33 times the amount on offer, compared with a so-called bid-to-cover ratio of 2.9 at the December auction.

“There is emerging uncertainty about whether the Bank of Japan alone can absorb the swelling debt issuance,” said Yuuki Sakurai, general manager of financial and investment planning in Tokyo at Fukoku Mutual Life Insurance Co., which manages the equivalent of $54 billion in assets.

To contact the reporter on this story: Yasuhiko Seki in Tokyo at Yseki5@bloomberg.net; Nate Hosoda in Tokyo at nhosoda@bloomberg.net.