Japan's Bonds Gain as Rate Outlook Boosts Auction Demand to Five-Year High
Japan’s bonds rose as a sale of two- year notes drew the highest demand in five years amid speculation the central bank will keep interest rates near zero.
Longer-maturity debt led gains, with 30-year yields falling to the lowest level since December 2008, after a Bank of Japan report showed prices for corporate services dropped for a 21st month. Today’s 2.6 trillion yen ($29.9 billion) auction of two- year securities drew bids for 5.67 times the amount of offer, the highest bid-to-cover since June 2005.
“With an interest-rate hike unlikely for the next two years, there are funds that have no destination but bonds,” said Chotaro Morita, chief strategist at Barclays Capital Japan Ltd. in Tokyo. “Potential demand for bonds is still strong.”
The yield on the benchmark 10-year bond fell one basis point to 1.05 percent as of 3:58 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1.1 percent security maturing in June 2020 gained 0.089 yen to 100.447 yen.
The 30-year yield slid two basis points to 1.785 percent. Ten-year bond futures for September delivery gained for a second day, rising 0.12 to 141.86 at the 3 p.m. close at the Tokyo Stock Exchange.
The Bank of Japan said its corporate services price index slid 1 percent in June from a year earlier, after dropping a 0.8 percent the previous month. The central bank, which has been grappling with deflation for 12 years, said last month the gauge responds to the economic cycle more sensitively than other similar indexes.
Deflation Signs
Japanese consumer prices excluding fresh food fell 1.1 percent year-on-year in June, according to a Bloomberg survey of economists before the July 30 report. Deflation, or a drop in general price levels, enhances the value of the fixed payments from debt.
The difference in yield between 2-year and 20-year bonds shrank to 160.5 basis points from 165 basis points at the end of last week. The spread was 202.5 basis points on March 18.
Two-year yields tend to central bank interest rates, while longer-maturity bonds are more influenced by the outlook for inflation.
Japanese banks are turning to longer-maturity debt and the swap market to capture profits as yields on their preferred five-year securities languish near a seven-year low, said Tokuyoshi Takano, a financial-derivatives manager at Mitsui Sumitomo Insurance Co.
Lenders are buying 10-year government bonds and making fixed payments on interest-rate swaps in exchange for six-month Libor, the London interbank offered rate, he said.
To contact the reporter on this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net.
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