Japan's Bonds Gain for Second Week on Signs of Global Economic Slowdown

Japanese bonds completed a second weekly gain as evidence global economic growth is losing momentum boosted demand for the safety of government debt.

Ten-year bond futures climbed to the highest level since 2003 before a report next week that economists said will show export growth slowed, adding pressure on the central bank to introduce new stimulus measures. Futures climbed for a sixth week as government reports showed the economy grew at the slowest pace in three quarters and claims for U.S. jobless benefits unexpectedly increased.

“Economic growth is slowing globally and the upside for bond yields is limited,” said Takafumi Yamawaki, chief rates strategist at JPMorgan Chase & Co. in Tokyo. “There is a risk that a relatively light recession, like damp weather, will continue for a longer period.”

The yield on the benchmark 10-year bond fell 5.5 basis points this week to 0.925 percent at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1.1 percent security due June 2020 added 0.499 yen to 101.575 yen. The yield dropped to 0.9 percent on Aug. 18, the lowest since August 2003.

Ten-year bond futures for September delivery rose 0.47 this week to 142.86 on the Tokyo Stock Exchange. They climbed to 143.04 yesterday, the highest for a benchmark contract since June 2003. Futures extended their weekly winning streak to the longest since January 2008.

BOJ Action

Bonds were boosted by speculation the Bank of Japan will take additional steps to cap interest rates after the yen climbed to a 15-year high. The yen rose to 84.73 per dollar on Aug. 11, the strongest level since 1995, damping the outlook for the nation’s exporters.

Economic growth slowed to an annualized 0.4 percent in the three months ended June 30, from 4.4 percent the previous quarter, the government said Aug. 16. The median estimate of economists surveyed by Bloomberg was for growth of 2.3 percent.

“The conditions are set for the Bank of Japan to ease monetary policy sooner or later,” said Akito Fukunaga, chief rates strategist in Tokyo at Royal Bank of Scotland Group Plc., the U.K.’s biggest government-owned bank.

The BOJ is still assessing the economic effect of the yen’s appreciation, according to three people familiar with the matter. Reports released since the central bank kept policy unchanged on Aug. 9-10 don’t suggest economic conditions have suddenly deteriorated, one of the people said on condition of anonymity.

Exports Slow

Export growth slowed to 21.8 percent in July from a year earlier, from 27.7 percent the previous month, according to a Bloomberg survey before the Aug. 25 report. U.S. jobless claims rose to 500,000 in the week ended Aug. 14, the Labor Department said Aug. 19, exceeding all economist estimates.

Longer-maturity bonds posted the biggest gains this week. Twenty-year yields slid six basis points to 1.55 percent after falling as low as 1.52 percent on Aug. 19, the least since August 2003.

Ten-year yields will fall to 0.80 percent by the year-end, JPMorgan’s Yamawaki said. Should his projection prove accurate, investors who bought yesterday will get a 1.4 percent return during the period, according to Bloomberg calculation.

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

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