Japan's Benchmark Bond Yields Drop to Seven-Year Low on Slowdown Concern

Japanese bonds rose, sending 10- year yields to a seven-year low, as signs the global economic recovery may stall triggered declines in stocks and spurred demand for government debt as a refuge.

Japan’s bonds completed their best first half since 2005, according to indexes compiled by Bank of America Merrill Lynch. Economists said reports this week will show slowing growth in U.S. business activity and Chinese manufacturing, signaling the global economy is feeling the pinch from Europe’s debt crisis and fiscal consolidation among developed countries.

“Economic data are showing weakness while stocks are falling and the yen is gaining, all of which serve as catalysts for bond buying,” said Seiji Shiraishi, chief economist for Japan at HSBC Holdings Plc in Tokyo. “Ten-year yields may test the psychologically important 1 percent level and stay below that mark for an extended period of time.”

The yield of the benchmark 10-year bond hit 1.075 percent, the lowest since Aug. 15, 2003, before trading 1.085 percent as of 4:01 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price of the 1.3 percent bond due June 2020 rose 0.090 to 101.932 yen. Benchmark yields on June 24 fell below 1.15 percent for the first time since Aug. 18, 2003. A basis point is 0.01 percentage point.

Twenty-year yields dropped as much as five basis points to 1.8 percent, the least since January 2009.

Ten-year bond futures for September delivery gained 0.19 to 141.66 at the afternoon close on the Tokyo Stock Exchange.

Japanese debt handed investors a return of 2.1 percent since March 31 and 2 percent since Dec. 31, according to indexes compiled by Bank of America Merrill Lynch.

U.S. Manufacturing

The Institute for Supply Management-Chicago Inc.’s business barometer slipped to 59 in June from 59.7 the previous month, according to a Bloomberg News survey before the report today. China’s Purchasing Managers’ Index dropped to 53.2 this month from 53.9 in May, according to a separate survey ahead of the release tomorrow.

U.S. stocks slumped yesterday, sending the Standard & Poor’s 500 Index to the lowest since Oct. 30, while the yield on the two-year Treasury note fell to a record 0.5856 percent today. Japan’s Nikkei 225 Stock Average slid 2 percent today and the MSCI Asia Pacific Index of shares fell 1.1 percent.

“With Treasury’s yields falling, riskier assets stagnating and uncertainties about U.S. economic growth, there is no reason to sell debt right now,” said Makoto Yamashita, chief Japan rate strategist at Deutsche Securities Inc. in Tokyo. “We recommend buying bonds.”

Yen Strength

Bonds extended their advance as the yen traded near the strongest level in more than eight years against the euro, clouding prospects for profit growth at Japanese exporters.

“If the yen stays 10 percent higher than the average export hedging rate set by Japanese companies for 12 months, it will slash annual profit by nearly 5 percent on average, and Japan’s real gross domestic product by 0.4 percentage points,” said Tatsushi Shikano, senior economist in Tokyo at Mitsubishi UFJ Morgan Stanley Securities Co. “Under such circumstance, it is hard to expect investors to buy stocks and sell bonds.”

Japan’s currency yesterday reached 107.32 per euro, the strongest level since November 2001, and 88.29 against the dollar, the highest since May 6.

Japan’s large manufacturers expect the currency to average 91 per dollar this fiscal year, according to the Bank of Japan’s Tankan survey released in April.

CDS Rates Rise

The cost of protecting Asia-Pacific corporate and sovereign bonds from default increased amid lingering worries over the credit crisis in Europe.

The Markit iTraxx Australia index climbed five basis points to 142 basis points, heading for the sixth increase in seven trading days, according to Nomura Holdings Inc. and CMA DataVision in New York. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan added five basis points to 147 basis points in Singapore, the highest since June 10, Royal Bank of Scotland Group Plc and CMA prices show.

“As longs as worries about the depth of the debt crisis in Europe remain intact, we can’t exit from bets that the debt market will maintain a firm undertone,” said Takeo Okuhara, a fund manager in Tokyo at Daiwa SB Investments Ltd., a unit of Japan’s second- largest securities broker.

Credit-default swap indexes are benchmarks for protecting bonds against default and traders use them to speculate on credit quality. An increase suggests deteriorating perceptions of credit quality and a drop shows improvement.

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

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