Benchmark 10-Year Yields Are Near Week High on Stock Gains, Recovery Signs

Japan’s 10-year yields were near a one-week high as stocks gained after a government report showed sentiment among large manufacturers improved, adding to signs the nation’s economic recovery remains on track.

Demand for government debt was limited on speculation primary dealers will cut their holdings to prepare for a 1.1 trillion yen ($12 billion) sale of 20-year bonds this week. Japan’s large manufacturers said business conditions were better than three months ago and they planned to increase spending, signaling the nation’s export-led recovery is gaining traction.

“I remain optimistic about Japan’s economic fundamentals,” said Akihiko Inoue, chief market analyst in Tokyo at Mizuho Investors Securities Co., a unit of Japan’s second-largest bank. “Bonds have been overbought and yields are bound to go up.”

The yield on the 1.3 percent bond due June 2020 was little changed at 1.235 percent as of 4:24 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price gained 0.044 yen to 100.667 yen. The yield climbed to 1.245 percent on June 11, the highest level since June 4.

Ten-year bond futures for September delivery rose 0.02 to 140.36 as of the afternoon close on the Tokyo Stock Exchange. The Nikkei 225 Stock Average advanced for a third day, gaining 1.8 percent.

Ten-year yields may increase to 1.40 percent by Sept. 30, Mizuho’s Inoue said. Should his forecast prove accurate, investors who buy the securities today will incur a 1.2 percent loss, Bloomberg calculations show.

BOJ Meeting

Bonds found some buyers as economists forecast the central bank will keep interest rates near zero at the end of two-day policy meeting that started today.

The Bank of Japan will hold the benchmark at 0.1 percent, according to all 14 economists surveyed by Bloomberg News.

“Supply-demand conditions continue to be good for bonds,” said Shinji Hiramatsu, senior investment manager in Tokyo at Sompo Japan Asset Management Ltd., which oversees the equivalent of $15 billion. “There’s no chance the BOJ will raise rates anytime soon.”

The central bank is also set to detail a plan to stimulate credit for private companies that may prove insufficient to spur economic growth and defeat deflation. The program is unlikely to exceed a few trillion yen, two people familiar with the matter said on condition of anonymity because the talks are private.

The Ministry of Finance will sell 20-year bonds on June 16. Primary dealers, which are required to bid at government debt sales, often reduce debt holdings before an auction in case prices drop before they can pass on the securities to investors.

The previous 20-year sale on May 20 drew bids for 3.93 times the amount on offer, down from a so-called bid-to-cover ratio of 4.02 at the April sale.

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

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