Japan's Five-Year Notes Fall as Lowest Yield in Seven Years Damps Demand

Japan’s five-year notes fell, snapping a seven-day advance, on speculation the lowest yields since 2003 will deter buyers at this week’s debt sales.

Bond futures retreated from the highest level in more than two years as today’s sale of 30-year debt drew the least demand since 2004. Bonds also slid as the euro rebounded and Asian stocks halted a global slump after comments from Ben S. Bernanke, the chairman of the U.S. Federal Reserve, eased investor concerns over weakness in the global economy.

“Yields have already fallen to levels that are no longer attractive,” said Yasuhide Yajima, senior economist in Tokyo at NLI Research Institute Ltd. “Even if there are concerns that the debt crisis in Europe will darken the outlook for the global economy, it is still on the mend.”

Five-year yields rose one basis point to 0.38 percent as of 4:39 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price fell 0.048 to 100.562 yen. Yields declined to 0.365 percent yesterday, a level unseen since August 2003.

The yield on the 1.3 percent bond due in June 2020 rose half a basis point to 1.23 percent.

Ten-year bond futures for June delivery fell 0.08 to 140.92 at the Tokyo Stock Exchange after earlier touching 141.04, the most since March 2008.

New Finance Minister

The 600 billion yen ($6.6 billion) sale of 30-year bonds attracted bids for 2.25 times the amount on offer, the worst ratio since April 2004. The Ministry of Finance will sell 2.4 trillion yen in five-year notes on June 10.

Yoshihiko Noda was named Japanese finance minister, bringing support for spending cuts as Prime Minister Naoto Kan compiles a plan to rein in the world’s biggest public debt.

Noda becomes the nation’s ninth finance chief in four years, replacing Kan, who takes office as premier today following last week’s resignation of Yukio Hatoyama. Chief government spokesman Yoshito Sengoku announced the Cabinet today in Tokyo. In his previous role as vice finance minister, Noda has opposed using bond issuance to pay for new spending measures and last month warned that any let-up in fiscal discipline threatened to send yields soaring.

Stocks Gain

The Nikkei 225 Stock Average rose 0.2 percent and the MSCI Asia Pacific Index of regional shares advanced 0.3 percent. U.S. stocks declined yesterday, sending the Standard & Poor’s 500 Index to the biggest two-day loss since March 2009.

Bernanke said during a question-and-answer session with Sam Donaldson, the ABC News journalist, in Washington that the recovery in the world’s largest economy is moving at a “moderate” pace and that the Federal Reserve may raise interest rates from a record low before the economy returns to “full employment.”

“Bernanke’s comments seem to reflect his confidence in the strength of the ongoing recovery, which is good for risk appetite,” said Ayako Sera, a strategist at Tokyo-based Sumitomo Trust & Banking Co., which manages the equivalent of $307 billion.

Bond losses were limited amid concerns that the global economic recovery may slow due to the debt crisis in Europe.

Recovery Concerns

German industrial production rose 0.7 percent in April following a 4 percent surge in the previous month, according to a Bloomberg News survey of economists before the release of the data today. Japan’s machinery orders, an indicator of business investment in three to six months, rose 1.7 percent in April following a 5.4 percent increase in the previous month, according to a separate survey ahead of the report tomorrow.

Janet Yellen, President Barack Obama’s pick to be the Federal Reserve’s next vice chairman, said in a speech in San Francisco that while there appear to be improvements in the global economy, “significant headwinds to stability remain.”

“Investors are now calling into question the sustainability of the global recovery,” said Hideyuki Suzuki, general manager of investment market research department at SBI Securities Co., a unit of financier SBI Holdings Inc. “As doubts about the global economy emerge, people shun riskier assets and shift allocations to safer assets such as bonds.”

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

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