Japan's Government Bonds Rise as Europe's Debt Crisis Boosts Safety Demand

Japan’s bonds rose, pushing down 10-year yields from near a two-week high, as Europe’s lingering fiscal crisis spurred demand for the safety of government debt.

Bond futures advanced after local stocks fell and Spain’s central bank said it plans to publish the results of stress tests carried out on the nation’s lenders to counter speculation it needs international aid. Japanese bonds also gained after an auction of 20-year securities drew the strongest demand in more than two decades yesterday.

“Spain’s financial sector still seems to be under stress, stoking concern about another disruption in markets,” said Akito Fukunaga, Tokyo-based chief rates strategist at Royal Bank of Scotland Group Plc. “Investors are buying bonds because yields are unlikely to rise much from here.”

The yield on the 1.3 percent bond due June 2020 fell one basis point to 1.225 percent at 3:33 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price rose 0.089 yen to 100.667.

Ten-year yields touched 1.245 percent on June 11, the highest since June 4. A basis point is 0.01 percentage point.

Five-year yields dropped one basis point to 0.4 percent. Ten-year bond futures for September delivery gained 0.13 to 140.41 as of the afternoon close at the Tokyo Stock Exchange. The Nikkei 225 Stock Average fell 0.7 percent.

Ten-year yields may fall to 1.2 percent by the end of September, Royal Bank of Scotland’s Fukunaga said. If his forecast proves accurate, investors who buy securities today will make a 0.6 percent return, Bloomberg calculations show.

Fiscal Problems

Spain Prime Minister Jose Luis Rodriguez Zapatero is trying to convince investors he can trim the euro region’s third-largest deficit, shore up the country’s banks and lift the economy out of a two-year slump. The euro weakened on speculation European Union leaders will agree on new financial- market regulations when they hold a summit meeting today.

“External factors such as lingering fiscal problems in Europe continue to support bonds,” said Kazuhiko Sano, chief strategist in Tokyo at Citigroup Global Markets Japan Inc.

Yesterday’s 20-year sale drew bids for 4.60 times the amount on offer, up from a so-called bid-to-cover ratio of 3.93 times at the previous auction in May. That was the highest ratio since September 1987.

“Investors have a consensus that yields will stay low as the central bank continues monetary easing,” said Makoto Noji, a senior market analyst at Mizuho Securities Co. in Tokyo, a unit of Japan’s second-largest banking group. “Given that background, demand rose at the auction with a 2 percent coupon. The results were pretty good.”

The Bank of Japan this week unveiled a new credit program of as much as 3 trillion yen ($32.9 billion) that will extend loans to companies for as long as four years to strengthen the economic recovery. New loans will be extended at the benchmark interest rate of 0.1 percent.

The yen gained to 112.10 per euro from 112.57 in New York yesterday. The dollar climbed to $1.2271 per euro from $1.2311.

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

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