Japan’s 20-Year Bonds Post Biggest Decline in a Month on Supply

By Theresa Barraclough

Feb. 21 (Bloomberg) -- Japan’s 20-year bonds posted their biggest weekly decline in a month on concern Prime Minister Taro Aso will sell more debt to fund plans to revive an economy heading for its worst recession since World War II.

The benchmark 20-year yield yesterday rose to the highest level in a week after Finance Minister Kaoru Yosano said the government needs to use “all possible means” to revive growth, fanning concern spending will increase. Japanese stocks slid and the yen weakened against the dollar as a government report this week showed the world’s second-largest economy shrank last quarter the most since the 1974 oil crisis.

“Concern over increases in debt supply is stopping people from buying as there is added risk to investment,” said Tomohiko Katsu, deputy general manager of the capital market division at Shinsei Bank Ltd. in Tokyo.

The yield on the 1.9 percent bond due December 2028 rose 4.5 basis points this week to 1.91 percent according to Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price fell 0.650 yen to 99.856 yen. The yield climbed as high as 1.93 percent yesterday, the most since Feb. 10.

Ten-year yields increased 1.5 basis points, or 0.015 percentage point, this week to 1.275 percent. Ten-year bond futures for March delivery advanced 0.14 this week to 139.50 at the Tokyo Stock Exchange.

The difference in yield, or spread, between U.S. 10-year notes and similar-dated Japanese debt widened to 1.56 percentage points on Feb. 19, from 1.03 percentage points at the beginning of the year, suggesting increasing debt supply is a bigger concern for the U.S. market.

Record Debt Sales

The U.S. plans to sell a record $94 billion of two-, five- and seven-year notes next week. Prime Minister Aso in December announced plans to inject as much as 12 trillion yen ($127.6 billion) into Japanese banks.

“The tug-of-war situation in the market between the deterioration of the economy versus supply concern will not ease by the end of March,” said Nobuto Yamazaki, an executive fund manager at Diam Asset Management in Tokyo.

Japan’s government lowered its assessment of the economy for a fifth month on Feb. 19, leading to speculation it will unveil more spending measures. “The economy is worsening rapidly amid severe conditions,” the Cabinet Office said in its report for February.

Yen, Stock Losses

The yen fell against the dollar this week on speculation demand for the currency as a haven will wane. The yen declined as former Finance Minister Shoichi Nakagawa quit, spurring concern the government’s 10 trillion yen stimulus plan will stall in parliament.

The Nikkei 225 Stock Average fell 4.7 percent this week and the broader Topix index posted its lowest close in 25 years yesterday. Japan’s bonds often move in the opposite direction to stocks. Benchmark 10-year yields had a correlation of 0.74 with the Nikkei this month, according to data compiled by Bloomberg. A value of 1 means the two moved in lockstep.

Benchmark bonds handed investors a return of 0.2 percent this month through Feb. 19, according to indexes compiled by Merrill Lynch & Co. The Nikkei lost 4 percent in the same period.

Demand for 20-year securities may stay subdued before the Ministry of Finance sells 900 billion yen of the debt next week, according to Calyon Securities, one of the 24 primary dealers required to bid at government debt sales.

20-Year Auction

“The next focus is the 20-year JGB auction next week,” said Susumu Kato, chief economist in Tokyo at Calyon. “Until then, there will be some kind of adjustment of positions.”

Japan’s yield curve, a graph that plots the yields of bonds of the same quality but with different maturities, inverted on Feb. 19 as 30-year rates fell below 20-year yields for the first time since 2000.

Twenty-year debt yesterday yielded half a basis point below 30-year securities, after yielding one basis point more on Feb. 19, according to data compiled by Bloomberg. Longer-term securities normally yield more than shorter-term ones to compensate investors for the extra risk of holding them until they mature.

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