Japan Bonds Rise, Bring Yields Down From One-Week High, on Europe Concerns

Japan’s 10-year yields fell from a one-week high as concern Europe’s credit crisis will worsen boosted demand for the relative safety of government debt.

Demand for bonds increased after Fitch Ratings on May 28 cut Spain’s credit grade one step to AA+. Bond futures also advanced as a report today showed Japan’s industrial production rose in April less than economists expected.

“I don’t know what will solve Europe’s problems completely because it’s very difficult to regain the full confidence of markets,” said Akihiko Inoue, chief market analyst in Tokyo at Mizuho Investors Securities Co., a unit of Japan’s second- largest bank. “Japan’s bonds continue to be supported.”

The yield on the 1.3 percent bond due March 2020 fell half a basis point to 1.245 percent at 10 a.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price rose 0.044 yen to 100.480 yen.

The yield touched 1.27 percent on May 28, the highest since May 20. A basis point is 0.01 percentage point.

Ten-year bond futures for June delivery gained 0.05 to 140.50 at the Tokyo Stock Exchange.

Ten-year yields may drop to 1.2 percent by the end of June, according to Mizuho’s Inoue. Should his forecast prove accurate, investors who buy the securities today will make a 0.5 percent return, Bloomberg calculations show.

Spain is struggling to cut the euro region’s third-largest budget deficit as the nation’s economy is forecast to contract for a second year. Standard & Poor’s lowered Spain’s ratings to AA on April 28.

‘Far From Solution’

“The market consensus is that the crisis is far away from a solution,” said Kazuhiko Sano, chief strategist in Tokyo at Citigroup Global Markets Japan Inc. “Bonds should rise.”

Japan’s factory output advanced 1.3 percent in April after rising 1.2 percent in March, the Ministry of Economy, Trade and Industry reported today in Tokyo. Economists in a Bloomberg News survey estimated a 2.5 percent gain.

Bank of Japan Governor Masaaki Shirakawa will speak at the Japan National Press Club at 12:20 p.m. today.

Gains in bonds were limited amid speculation primary dealers, which are required to bid at government sales, will reduce their holdings to prepare for tomorrow’s 10-year auction.

Auction Looms

“Investors will be hesitant to test higher prices with the auction due tomorrow unless new factors come up and stocks slide,” said Naomi Hasegawa, a senior debt strategist in Tokyo at Mitsubishi UFJ Morgan Stanley Securities Co., a unit of Japan’s largest lender by assets. “I expect a 1.3 percent coupon to be set for the auction.”

The Nikkei 225 Stock Average was little changed at 9,752.13.

The Ministry of Finance will sell 2.2 trillion yen ($24.2 billion) of the securities. Primary dealers often trim their holdings of bonds in case prices decline before they can pass on new securities to investors.

The prior 10-year sale on May 11 drew bids worth 3.52 times the amount on offer, compared with a so-called bid-to-cover ratio of 2.52 at the April sale.

To contact the reporter on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net.

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