Japan's Bonds Fall After Central Bank Refrains From Increasing Liquidity

Japan’s bonds fell after the Bank of Japan refrained from taking additional measures to expand liquidity and kept its economic assessment unchanged.

Ten-year yields rose from near a seven-year low after the policy board headed by Governor Masaaki Shirakawa today kept the benchmark overnight interest rate unchanged at 0.1 percent and maintained credit programs for lenders by a unanimous vote. Bonds also fell on speculation primary dealers reduced debt holdings to prepare for tomorrow’s auction of five-year notes.

“It makes sense for the BOJ to hold off additional easing,” said Shinji Nomura, chief debt strategist at Tokyo- based Nikko Cordial Securities Inc. “Japan’s economic recovery has been on track since March 2009. Long-term yields have come down too much, taking into account excessive pessimism. They are set to rebound.”

The benchmark 10-year yield rose two basis points to 1.035 percent as of 4:26 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1.1 percent bond due June 2020 fell 0.180 yen to 100.581 yen. The yield touched a seven-year low of 0.995 percent on Aug. 4. A basis point is 0.01 percentage point.

Ten-year bond futures for September delivery dropped 0.20 to 141.93 as of the afternoon close at the Tokyo Stock Exchange.

The central bank, which has kept its benchmark rate at 0.1 percent since December 2008, in December unveiled a credit program that it later doubled to 20 trillion yen ($233 billion).

5-Year Sale

Ten-year yields may rise to 1.5 percent by the end of September, Nikko’s Nomura said. Should his forecast prove accurate, investors who buy today will incur a 3.8 percent loss, Bloomberg calculations show.

Five-year yields gained 1.5 basis point to 0.35 percent before the Ministry of Finance sells 2.4 trillion yen of five- year notes tomorrow.

“Investors are hesitant to see a 0.3 percent coupon for tomorrow’s five-year sale,” said Akihiko Inoue, chief market analyst in Tokyo at Mizuho Investors Securities Co., a unit of Japan’s second-largest bank.

The previous five-year sale on July 13 drew bids for 3.37 times the amount on offer, compared with a so-called bid-to- cover ratio of 3.57 at the June sale. Primary dealers, which are required to bid at government debt sales, often reduce holdings of bonds in case prices decline before they can pass on the new securities to investors.

Japan’s debt exceeded 904 trillion yen as of the end of June, the nation’s finance ministry said. The debt includes government bonds, loans and financing bills, according to a statement on the ministry’s website.

Fed’s Outlook

Losses in bonds were limited on speculation the Federal Reserve will today signal it intends to introduce new stimulus measures as the world’s biggest economy slows.

“It’s obvious U.S. macro data are deteriorating and the Fed is likely to keep monetary easing for longer,” said Akio Yoshino, chief economist in Tokyo at Amundi Japan Ltd., which manages the equivalent of $35 billion. “The drop in Treasury yields is likely to weigh on Japan’s yields as well.”

Speculation has been building that the Fed is moving toward a second round of debt purchases, known as quantitative easing, after economic reports cast doubt on economy’s ability to recover. The Fed bought $300 billion of Treasuries between March and October 2009 to bring down borrowing costs.

Interest-rate futures on the Chicago Board of Trade show a 46 percent chance U.S. policy makers will keep their benchmark rate in a range between zero and 0.25 percent through August 2011. The probability was 21 percent a month ago.

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

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