By Yasuhiko Seki
March 7 (Bloomberg) -- Japan’s 10-year bonds posted the biggest weekly decline in a month on concern the U.S., Japan and Europe will increase spending to help counter the deepening global recession.
Benchmark yields approached a four-week high as Chief Cabinet Secretary Takeo Kawamura said the government needs to make the “utmost effort” to prevent stocks from collapsing, spurring concern the nation’s debt burden will increase. Sales of government bonds will rise to 113.3 trillion yen ($1.17 trillion) in the year starting April 1 from 106.3 trillion yen this financial year, the Ministry of Finance said in December.
“Given the severe state of the Japanese economy, the government may need to boost budget spending by an additional 15 to 20 trillion yen,” said Hirokata Kusaba, a senior economist in Tokyo at Mizuho Research Institute Ltd., a unit of Japan’s second-largest bank. “The issuance of new bonds may increase by 30 trillion yen, boding ill for the debt market.”
The yield of the benchmark 10-year bond rose two basis points to 1.29 this week at Japan Bond Trading Co., the nation’s largest interdealer debt broker, the biggest increase since the five days ended Feb. 6.
Ten-year bond futures fell 0.86 to 138.64 in Tokyo and touched 138.49, the lowest since Feb. 10.
‘Much Worse’
Ten-year bonds gained yesterday, pushing yields down two basis points, after Finance Minister Kaoru Yosano told reporters that Japan’s economic data has been “much worse” than expected and the government will soon need to revise its forecast for gross domestic product.
The world’s second-biggest economy shrank an annualized 12.7 percent last quarter, the government said Feb. 16, the biggest contraction since the 1974 oil crisis. Capital spending excluding software dropped 18.1 percent in the three months ended Dec. 31, the seventh quarter of declines, a separate government report showed on March 5.
A Cabinet Office report on March 11 may show machinery orders slumped 40.2 percent in January from a year earlier, according to a Bloomberg News survey.
Signs of a deepening recession dragged the Nikkei 225 Stock Average down 5.2 percent this week. Ten-year yields had a correlation of 0.7 with the Nikkei in February, Bloomberg data show. A value of 1 would mean the two moved in lockstep.
“While falling stocks normally push yields down, we need to be alert to the risk that Japanese financial institutions, which suffered heavy equity losses, will sell bonds to generate profits before the fiscal year ends this month,” said Chotaro Morita, chief strategist at Barclays Capital Japan Ltd. in Tokyo. “Such selling of bonds may emerge as the Nikkei 225 comes closer to or falls below 7,000.”
General Motors
Bonds also fell this week on speculation the U.S. will boost spending to support the economy. General Motors Corp. slid 15 percent after its auditor said the automaker may not survive.
GM executives, who last year warned bankruptcy-based reorganization would have a catastrophic effect on customer confidence, are now more open to the idea of a structured bankruptcy, the Wall Street Journal reported yesterday, citing a person familiar with the company’s thinking.
“Talk of the failure of GM and the nationalization of more banks in the U.S. mean that the government will increase its involvement in addressing these issues,” said Yasuhide Yajima, senior economist at NLI Research Institute Ltd. in Tokyo. “Policy action increases the risk of bigger debt sales.”
The difference in yield between 10-year government debt in the U.S. and Japan widened to 153 basis points yesterday from 149 basis points the previous day. A basis point is 0.01 percentage point.
“There is only a marginal yield spread between Japan and overseas countries,” said Akio Yoshino, chief economist in Tokyo at Societe Generale Asset Management (Japan) Co., a unit of the French asset management firm that supervises the equivalent of $338 billion globally.
To contact the reporter on this story:
Yasuhiko Seki in Tokyo at
Yseki5@bloomberg.net.
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