Japan's Bonds Decline Most in Five Weeks on EU Aid Package, Weakening Yen

Japanese bonds fell the most in five weeks as European policy makers unveiled an aid package to prevent a sovereign debt crisis from spreading, damping demand for the safety of government debt.

Ten-year yields climbed to the highest level in two weeks as Asian stocks rallied after European Union finance chiefs announced the agreement to make as much as 750 billion euros ($973 billion) in loans available to countries under attack from speculators. Bonds also dropped before the Ministry of Finance sells 2.2 trillion yen ($23.7 billion) of 10-year debt tomorrow.

“The rescue plan will help curtail sovereign risk,” said Makoto Yamashita, chief Japan rate strategist at Deutsche Securities Inc. in Tokyo. “As this development will lead to stock gains and weakness in the value of the yen, I maintain a cautious stance toward bonds.”

The yield on the benchmark 10-year bond rose 2.5 basis points to 1.305 percent as of 4:10 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The increase was the most since April 27. The 1.4 percent security due March 2020 dropped 0.221 yen to 100.829 yen.

Ten-year bond futures for June delivery declined 0.25 to 139.66 at the afternoon close on the Tokyo Stock Exchange.

The European Central Bank also said it will intervene in government and private bond markets as part of an unprecedented effort to help stave off a sovereign debt crisis that threatens to destroy the euro.

‘Depth and Liquidity’

“The Governing Council decided to conduct interventions in the euro area public and private debt securities markets to ensure depth and liquidity in those market segments which are dysfunctional,” the ECB said in a statement.

Bonds also dropped on speculation a weaker yen will boost profits at export companies.

“Given the downturn of the yen, corporate profits are likely to maintain recovery momentum, which is a key to the stock market,” said Masaru Hamasaki, chief strategist in Tokyo at Toyota Asset Management Co., which oversees the equivalent of $15 billion. “A firm undertone on the equity market may slow the flight-to-safety flow.”

The yen weakened against all 16 of its most-active counterparts today, sliding as much as 1.6 percent versus the dollar. The Nikkei 225 Stock Average gained 1.6 percent.

‘Structural Problems’

The decline in bonds was tempered on speculation the European aid package will fail to resolve all of the region’s sovereign debt problems.

“The rescue package alone can’t resolve structural problems in Greece and in some other countries in the region, which have a weak fiscal structure,” said Kazuto Uchida, chief economist at Bank of Tokyo Mitsubishi UFJ Ltd. in Tokyo. “With concerns over sovereign risks in financially weak countries continuing, bonds in countries like Japan, the U.S. and Germany will benefit from the flight-to-safety flow.”

Japan’s 10-year yield may drop to 1.20 percent, he said.

Bonds also declined on speculation primary dealers, companies required to bid at government debt sales, reduced holdings of debt in case prices fall before they can pass on the new securities to investors.

“There are some concerns about the outcome of the auction with a 1.3 percent coupon,” said Kazuhiko Sano, chief strategist in Tokyo at Citigroup Global Markets Japan Inc., a unit of New York-based Citigroup Inc.

The previous 10-year sale on April 6 drew bids for 2.52 times the amount on offer, down from a so-called bid-to-cover ratio of 3.4 at the March auction.

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

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