Japan's Bond Yields Fall to Seven-Year Low on Signs Global Growth Slowing

Japanese bonds rose, pushing yields to a seven-year low, on speculation Europe’s fiscal problems will spread to the U.S. and boost demand for safer assets.

Benchmark bonds advanced for a third day after government reports showed U.S. new homes sales slumped last month and Japanese export growth slowed. Ten-year bonds extended a third week of gains after Prime Minister Naoto Kan pledged two days ago to balance the budget within a decade and demand increased at an auction of two-year notes today.

“As nations focus on austerity, I’m not sure the global economy will be able to withstand the impact, especially with dimmed outlooks for Europe, the U.S. and Japan,” said Satoshi Yamada, who helps oversee $10.5 billion as manager of fixed- income trading at Okasan Asset Management Co. in Tokyo. “Kan is showing resolve to work on fiscal rehabilitation, giving confidence to bond investors at least for now.”

The yield on the 1.3 percent bond due June 2020 dropped 2.5 basis points to 1.14 percent as of 3:47 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price rose 0.227 yen to 101.433 yen. The yield is at the lowest since Aug. 18, 2003.

Twenty-year yields slid four basis points to 1.89 percent, the lowest since March 2009. Ten-year bond futures for September delivery gained 0.14 to 141.06 at the afternoon close on the Tokyo Stock Exchange.

‘Less Supportive’

Bonds rallied after the Federal Reserve’s policy statement yesterday warned European indebtedness may harm U.S. growth.

“Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad,” the Fed’s Open Market Committee said in a statement after keeping interest rates at a record low.

Purchases of U.S. new homes dropped 33 percent to an annual pace of 300,000 in May, the Commerce Department said yesterday. U.S. durable goods orders declined 1.4 percent last month, according to a Bloomberg survey before today’s report.

Futures on the CME Group Inc. exchange yesterday showed an 11 percent chance U.S. policy makers will increase the Fed funds target by at least a quarter-percentage point by the December 2010 meeting, down from 36 percent odds a month earlier.

“As expectations fade about the Fed’s rate increase this year, Japan’s yields will be under downward pressure,” said Chotaro Morita, head of fixed-income strategy research at Barclays Capital. “The U.S. economic recovery seems to be peaking out in terms of speed.”

Exports Slow

Japan’s exports advanced 32.1 percent in May from a year earlier, down from April’s 40.4 percent, the Finance Ministry said in Tokyo. From the previous month, exports fell a seasonally adjusted 1.2 percent.

The government said in a fiscal strategy released on June 22 it aimed to balance its books within 10 years, restrict debt sales and overhaul the tax system. Japan would cap annual spending at 71 trillion yen ($790 billion) over the next three years, the government said.

Ten-year yields may fall to 1 percent by the end of September, Okasan’s Yamada said. If his forecast proves accurate, investors who bought the securities today would make a 1.5 percent return, Bloomberg calculations show.

Today’s sale of two-year notes drew bids for 4.31 times the amount on offer, up from a so-called bid-to-cover ratio of 3.68 times at the previous auction in May. The lowest price was 100.09 yen, matching the median estimate of 13 traders in a Bloomberg survey.

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

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