Japan’s Long-Term Bonds Complete Weekly Loss on Supply Concerns

By Yasuhiko Seki

Jan. 24 (Bloomberg) -- Japan’s long-term bonds completed a weekly decline on concern an increasing supply of debt will deter investors at an auction of 20-year securities.

Twenty-year yields approached a two-week high yesterday before the Ministry of Finance sells 900 billion yen ($10.1 billion) of 20-year bonds on Jan. 27. The government may need to auction a record 38.1 trillion yen of bonds in the fiscal year starting April 2011, the ministry said last week.

“The market is gradually becoming aware of budget and fiscal risks stemming from active policy actions,” said Hirokata Kusaba, a Tokyo-based senior economist at Mizuho Research Institute, the research arm of Japan’s second-biggest banking group, Mizuho Financial Group Inc.

The yield on 20-year government bonds rose 6.5 basis points to 1.865 percent this week, according to data from Japan Bond Trading Co., the nation’s largest interdealer debt broker. Thirty-year yields climbed 3 basis points to 1.92 percent. A basis point is 0.01 percentage point.

Benchmark 20-year yields reached 1.875 percent yesterday, the highest since Jan. 9, after U.S. and Britain stepped up steps to shore up their financial system, sparking fears about further increases in debt sales.

The previous auction of 20-year Japanese debt on Dec. 16 drew bids for 2.6 times the amount on offer, down from a so- called bid-to-cover ratio of 3.1 at the November sale.

Pre-auction trading suggests that the coupon rate may be lowered to around 1.9 percent from last month’s 2.1 percent, said Masashi Shimominami, a market analyst at Mizuho Securities Co. in Tokyo. “This will be a challenge for investor appetite,” Shimominami said.

BOJ Buys Bonds

The BOJ announced Jan. 22 that it will buy back 800 billion yen of securities with maturity dates of one year to 10 years, 460 billion yen of debt due in less than a year and 75 billion yen of debt with maturities ranging between 10 and 30 years.

“The announced plan of purchases of longer tenors by the Bank of Japan was smaller than the market had expected, which will support” rises in long-term debt yield, said Kazuhiko Sano, chief strategist in Tokyo at Nikko Citigroup Ltd., the Japanese unit of the second-largest bank in the U.S.

Losses in government bonds were tempered after the Bank of Japan also cut its 2009 economic growth forecast and signaled a return to deflation, after leaving its benchmark interest rate unchanged at 0.1 percent.

The bleak outlook helped drive the yield on Japan’s five- year bond as low as 0.66 percent yesterday, the least since September 2005. The yield fell 3 basis points during the week.

Focus on Fed

The Bank of Japan’s economic outlook “may trigger some speculation about more policy response by the central bank, thereby supporting the bond market,” said Atsushi Ito, strategist at Morgan Stanley Japan Securities Co. in Tokyo.

The near-term outlook for Japanese bonds is likely to be influenced by whether or not the U.S. Federal Reserve announces it will also repurchase government debt, said Takeo Okuhara, a strategist at Daiwa SB Investments in Tokyo.

The Federal Open Market Committee will hold a two-day policy meeting on Jan. 27-28.

“The focus is whether the Fed will announce outright purchases of the government debt, as had been widely expected by the market,” Okuhara said.

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