Japan 10-Year Yield Falls Below 1 Percent for First Time Since August 2003

Japan’s government bonds rose, pushing 10-year yields below 1 percent for the first time since August 2003, as the yen’s advance to an eight-month high against the dollar damped the outlook for exporters’ earnings.

Ten-year bonds gained for a fifth day on speculation the strengthening yen will increase deflationary pressures, enhancing the purchasing power of the fixed payments from debt. Bonds also advanced as Asian stocks fell before U.S. reports this week that economists said will show service industries grew at a slower pace and payrolls shrank for a second month.

“There’s a good chance that the global economy will slip into a second dip,” said Koji Ochiai, chief market economist in Tokyo at Mizuho Investors Securities Co., a unit of Japan’s second-largest bank. “Yields are going down not only in Japan, but also globally. That’s different from 2003. Japan’s yields will stay under downward pressure below 1 percent.”

The yield on the 1.1 percent bond due June 2020 fell 2.5 basis points to 0.995 percent as of 3:04 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price rose 0.226 yen to 100.943 yen. The yield was the lowest since Aug. 14, 2003.

Ten-year bond futures for September delivery gained 0.32 to 142.29 as of the afternoon close at the Tokyo Stock Exchange, after reaching 142.33, the highest for a benchmark contract since August 2003.

Yields to Fall

Ten-year yields may fall to 0.95 percent by the end of September, Mizuho’s Ochiai said. If his forecast proves accurate, investors who buy today will make a 0.5 percent return, according to Bloomberg calculations.

The yen rose as high as 85.33 per dollar, the strongest since Nov. 27. The Nikkei 225 Stock Average fell 2.1 percent.

“As a slowdown in the economy locks the yen in an uptrend, pressure is set to rise on the Bank of Japan to do additional easing,” said Akio Kato, team leader of Japanese debt in Tokyo at Kokusai Asset Management Co., which runs the $39.5 billion Global Sovereign Open fund. “The most promising option is to increase its bond purchase operation.”

Ten-year yields may decline to 0.8 percent by the end of September, Kato said.

The central bank buys 1.8 trillion yen ($21 billion) of government bonds from lenders each month. The BOJ in December unveiled a 10 trillion yen program to offer three-month loans at an interest rate of 0.1 percent. The move came after the yen surged to 84.83 per dollar on Nov. 27, the strongest since July 1995. The BOJ later doubled the program to 20 trillion yen.

Treasury 10-year yields fell three basis points to 2.88 percent, according to BGCantor Market Data.

U.S. Services, Jobs

The Institute for Supply Management’s non-manufacturing index, which covers about 90 percent of the U.S. economy, fell to 53 in July from 53.8 in June, according a Bloomberg survey before today’s report. The U.S. lost 60,000 jobs last month and the jobless rate rose to 9.6 percent from 9.5 percent, according to a separate survey before the Labor Department’s Aug. 6 report.

“Bonds are inclined to test higher prices,” said Akihiko Inoue, chief market analyst in Tokyo at Mizuho Investors Securities Co., a unit of Japan’s second-largest bank. “Yields may continue to drop further below 1 percent.”

Japan’s 10-year yields slipped to a record 0.43 percent on June 11, 2003.

The spread in yield between 5- and 20- year debt narrowed to 1.31 percentage points today, the least since July 2009, flattening the so-called yield curve.

‘No Signs’

“As there are no signs yields will rise in the short term, people are buying longer-term securities to get higher yields,” said Keiko Onogi, fixed-income strategist at Daiwa Securities SMBC Co. in Tokyo. “Investors including banks who want to buy and sell bonds in the short-term seem to be pushing 20-year yields lower.”

A yield curve is a chart that plots the yields of bonds of the same quality, but different maturities. It flattens when yields on shorter-maturity notes rise, those on longer-dated bonds fall, or both happen simultaneously.

Five-year yields fell 1.5 basis points to 0.335 percent. Twenty-year yields dropped five basis points to 1.645 percent, the lowest since September 2003. Thirty-year yields declined five basis points to 1.665 percent, the least since August 2003.

Finance Minister Yoshihiko Noda said a decline in borrowing costs reflects relative confidence in the country’s debt. Low yields show “trust in Japanese bonds and also a flight to quality,” Noda said at a news conference in Tokyo yesterday.

The Ministry of Finance will sell 300 billion yen of 40- year bonds tomorrow. The prior 40-year sale on May 13 drew bids worth 2.57 times the amount on offer, compared with a so-called bid-to-cover ratio of 3.78 at the January sale.

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

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