Japan's Bonds Decline on Speculation Yields Are Too Low to Reflect Growth

Japanese bonds dropped for a second day on speculation yields are too low given that the economy is showing signs of sustainable growth.

Benchmark 10-year yields have climbed more than five basis points since they fell to 0.995 percent two days ago, the lowest level since Aug. 14, 2003. The coincident index, a composite of 11 indicators including factory production and retail sales, rose in June from the previous month, a report showed today.

“Ten-year yields are too low, given that the economy is mildly recovering,” said Shinji Nomura, chief debt strategist in Tokyo at Nikko Cordial Securities Inc., a unit of Japan’s third-largest lender by assets. Yields are likely to rise to 1.6 percent by the end of this year, he said.

The yield on the benchmark 10-year bond rose two basis points to 1.055 percent as of 3:14 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price of the 1.1 percent security due June 2020 fell 0.180 yen to 100.401 yen. A basis point is 0.01 percentage point.

Ten-year bond futures for September delivery declined 0.14 to 141.87 at the 3 p.m. close of the Tokyo Stock Exchange.

The coincident index gained to 101.3 from 101.2 in May, the Cabinet Office said in Tokyo. The median estimate of nine economists surveyed by Bloomberg News was 101.2.

An Aug. 11 report will show machinery orders rose 5.5 percent in June from the previous month, according to economist forecasts. That would be the biggest gain since December.

‘Double-Dip Recession’

“We don’t expect a double-dip recession although the bond market has priced in prolonged deflation and the worsening of the economy,” said Koichi Kurose, chief strategist at Tokyo- based Resona Bank Ltd., which manages about $57 billion. “Any economic recovery isn’t usually straightforward.”

Japan’s bond yields may extend declines from a seven-year low, pushing 10-year rates down to 0.80 percent as a global slowdown spurs safety demand, Royal Bank of Scotland Group Plc. and Okasan Asset Management Co. said.

“Treasury yields may fall more as the Fed keeps monetary easing for a longer time,” said Satoshi Yamada, who helps oversee $110 billion as manager of fixed-income trading at Okasan Asset Management in Tokyo. “A drop in U.S. yields will weigh on Japan’s yields as well.”

Federal Reserve Chairman Ben S. Bernanke said on July 21 the economic outlook remains “unusually uncertain” and the Fed remains “prepared to take further policy actions as needed.”

Additional monetary easing by the Fed easing may weaken the dollar against the yen, push down Japanese stocks and boost government bonds, said Yuuki Sakurai, chief executive officer of Tokyo-based Fukoku Capital Management Inc.

Sell Signal

The drop in Japan’s 10-year yields on Aug. 4 pushed the 14- day relative strength index below the level of 30, suggesting the securities were poised to change direction.

“The market seems to be running ahead of reality,” said Ayako Sera, a strategist in Tokyo at Sumitomo Trust & Banking Co., which manages the equivalent of $310 billion. “The U.S. job market is recovering, albeit mildly.”

Job losses at U.S. companies probably slowed to 65,000 positions last month from 125,000 in June, according to economists surveyed by Bloomberg News before the Labor Department releases the data today.

Japanese bonds also fell as Asian stocks gained for a second day, damping demand for the safety of government debt. MSCI’s Asia Pacific Index of shares rose 0.3 percent, erasing earlier losses.

To contact the reporter on this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net.

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