Japan's Bonds Gain a Third Week on Stock Losses, Government's Fiscal Plan

Japan’s bonds rose for a third week as Asian stocks declined and the government pledged to balance its books within a decade, boosting demand for the nation’s debt.

Benchmark 10-year yields dropped to the lowest level since 2003 as government reports showed export growth slowed and consumer prices fell for a 15th month, enhancing the purchasing power of the fixed payments from debt. Bonds gained as Prime Minister Naoto Kan’s administration also pledged to restrict debt sales and overhaul the tax system.

“Optimism is fading about the global economic recovery,” said Katsutoshi Inadome, a strategist in Tokyo at Mitsubishi UFJ Morgan Stanley Securities Co., a unit of Japan’s largest bank. “Investors who’d thought yields would go up in June are playing catch-up and buying before the second quarter ends.”

The yield on the 1.3 percent bond due June 2020 dropped six basis points this week to 1.14 percent in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price rose 0.540 yen to 101.432 yen. The yield fell to 1.125 percent yesterday, the least since Aug. 18, 2003.

Ten-year bond futures for September delivery gained 0.45 this week to 141.06 at the afternoon close yesterday at the Tokyo Stock Exchange. They rose to 141.18, the highest for a benchmark contract since June 9.

Stock Losses

Japanese stocks posted the biggest weekly loss in a month as U.S. reports showed the recovery in the world’s largest economy is slowing.

The Nikkei 225 Stock Average slumped 2.6 percent over the week, the biggest drop since the five days ended May 21. The yen climbed to 89.23 per dollar on June 24, the strongest since May 21, damping the outlook for Japanese exporters.

The Nikkei 225 and 10-year yields had a correlation of 0.7 in the past month, according to data compiled by Bloomberg. A value of 1 would mean the two moved in lockstep.

“As the yen has risen gradually since early June and stocks struggle to advance, bonds are unlikely to be sold much,” Tetsuya Miura, chief market analyst in Tokyo at Mizuho Securities Co., wrote in a research note. “It’s hard to see what will reverse the trend for bonds.”

Consumer prices excluding fresh food slid 1.2 percent in May from a year earlier, the statistics bureau said yesterday. Exports advanced 32.1 percent from a year earlier, less than April’s 40.4 percent gain, the Finance Ministry said June 24.

Fiscal Plan

Bonds also gained this week as the government said in its fiscal strategy released June 22 that annual spending will be capped at 71 trillion yen ($791 billion) over the next three years. The government will decide changes to the tax regime “soon,” the prime minister said.

Bonds yesterday pared this week’s advance on speculation yields near a seven-year low deterred investors from buying debt.

The 14-day relative strength index for 10-year yields fell to 29.5 on June 24, below the 30 threshold that some traders see as a sign a security is about to change direction.

Ten-year yields rose 1.5 basis points yesterday.

“Yields are bound to go up somewhat as investors finish buying at the end of the second quarter,” said Osamu Koizumi, who helps manages about $7.6 billion as chief investment officer at Yasuda Asset Management Co. in Tokyo. “People are buying bonds not because they want to, but because they don’t have an alternative. There’s no reason to expect 10-year yields to go to 1.1 percent or 1 percent.”

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

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