Japan's Bonds Rise, Yields Touch Seven-Year Low, on Global Slowdown Signs

Japanese bonds rose, pushing 10-year yields to the lowest level in seven years, as signs economic growth is slowing around the world increased demand for the relative safety of government debt.

Longer-maturity bonds led gains after a report showed Japan’s machine orders grew less than economists forecast and the Federal Reserve said the U.S. recovery will be “more modest” than anticipated. Bonds also rallied as Japanese stocks slumped, and a sale of five-year notes drew the strongest demand in more than five years.

“The machine-orders number makes me a bit pessimistic about the economy because it implies bank lending won’t grow,” said Tetsuya Miura, chief market analyst in Tokyo at Mizuho Securities Co., a unit of Japan’s second-largest banking group. “The Fed’s statement is definitely not a sell factor and suggests there’s still room for bonds to be bought.”

The yield on the 1.1 percent bond due June 2020 fell two basis points to 1.01 percent as of 3:26 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price rose 0.179 yen to 100.805 yen. The yield earlier dropped to 0.995 percent, matching the lowest since August 2003.

The 30-year yield slid 4.5 basis points to 1.635 percent. Ten-year bond futures for September delivery gained 0.23 to 142.16 at the afternoon close at the Tokyo Stock Exchange.

Orders Slow

Japan’s machine orders, an indicator of business investment in the next three to six months, rose 1.6 percent in June, the Cabinet Office said today in Tokyo. Economists surveyed by Bloomberg News forecast a 5.4 percent gain.

The yen strengthened against all 16 of its major counterparts, rising as high as 85.19 per dollar, approaching its eight-month peak of 85.02 reached Aug. 6. The Nikkei 225 Stock Average fell 2.7 percent.

The Fed will reinvest principal payments on mortgage assets it holds into long-term Treasuries after determining “the pace of economic recovery is likely to be more modest in the near term than had been anticipated,” the Federal Open Market Committee said in a statement yesterday in Washington.

“Financial markets will pay the most attention to whether the Fed’s balance sheet will expand further,” said Akito Fukunaga, chief rates strategist in Tokyo at Royal Bank of Scotland Group Plc., Britain’s biggest government-owned bank. “As there’s still a risk Treasuries may surge, it’s not the time for investors to go short on Japan’s bonds.” A short position is a bet an asset will fall.

Five-Year Auction

Treasury 10-year yields dropped to the lowest level in 16 months as the Fed retained a commitment to keep its benchmark interest rate close to zero for an “extended period.”

The Bank of Japan yesterday refrained from taking additional measures to expand liquidity and kept its economic assessment unchanged. The BOJ in December unveiled a credit program that it later doubled to 20 trillion yen ($234 billion). It has held its benchmark at 0.1 percent since December 2008.

Japan’s bonds also rose as today’s five-year sale drew bids for 4.68 times the amount on offer, the most since April 2005. The lowest price at the auction was 99.87 yen, higher than 99.86 predicted by 13 traders surveyed by Bloomberg.

“The auction results highlight the ongoing trend that investors have few other options but to buy bonds,” said Takeshi Minami, chief economist at Norinchukin Research Institute Co. in Tokyo. “Now that the Fed is taking action, expectations may rise for the BOJ to do something. The easiest option would be to extend or expand the new credit program.”

Five-year yields dropped two basis points to 0.33 percent after touching 0.325 percent, matching the lowest since July 2.

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

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