Japan's Bonds Drop on Concern Government to Boost Debt Sales for Stimulus

Japan’s 10-year bonds declined before an auction tomorrow amid concern the government will issue more debt to finance measures to bolster the economy.

The Finance Ministry will sell 1.1 trillion yen ($12.9 billion) in 20-year bonds tomorrow. The government may have to boost debt sales to fund an upcoming stimulus package, a senior ruling party official said yesterday, as economic growth falters.

“The market will lack a clear direction because it remains to be seen how much the government will shell out for new stimulus spending and whether it will lead to more bond issuance,” said Susumu Kato, chief economist in Tokyo for Japan at Credit Agricole CIB and CLSA.

The yield on the benchmark 10-year bond increased 1.5 basis points to 0.94 percent as of 3:11 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1.1 percent security due June 2020 fell 0.138 yen to 101.437 yen. A basis point is 0.01 percentage point.

Ten-year bond futures for September delivery dropped 0.03 to 142.83 at the 3 p.m. close on the Tokyo Stock Exchange.

The 14-day relative strength index for 10-year yields fell to 32 on Aug. 20, approaching the 30 threshold that signals a security may change direction.

The government may issue more deficit-covering bonds if additional stimulus measures exceed 1.7 trillion yen, Koichiro Gemba, head of the Democratic Party of Japan’s policy board, said on Fuji TV yesterday. Prime Minister Naoto Kan has asked his ministers to come up with proposals to bolster the economy.

‘Trouble-Free’ Auction

Gross domestic product growth slowed to an annualized 0.4 percent in the three months ended June 30, from a revised 4.4 percent the previous quarter, the government said on Aug. 16.

The 20-year bond sale on July 22 drew bids valued at 4.46 times the amount on offer, compared with a ratio of 4.6 in June. 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.

“The auction on 20-year bonds should be trouble-free,” said Makoto Noji, a senior market analyst at Tokyo-based Mizuho Securities Co. “Investors are buying super-long bonds because of low yields on shorter-maturity debt.”

Purchases of so-called super-long bonds by Japanese city banks exceeded sales of such securities by 395.4 billion yen in July, a record since the tally began in April 2004, Akihiko Inoue, chief market analyst in Tokyo at Mizuho Investors Securities Co., wrote in a report today, citing data compiled by Japan Securities Dealers Association.

Signs of Slowdown

Bond losses were limited as reports this week may add to evidence that global economic growth will slow.

Japan’s export growth advanced 21.8 percent in July from a year earlier after increasing 27.7 percent in June, according to a Bloomberg News survey before the Finance Ministry reports the data on Aug. 25. Sales of previously owned homes in the U.S. slumped for a third month in July, another survey showed before the Aug. 24 report from the National Association of Realtors.

Some investors “are getting worried about the outlook as the recovery is slowing down,” Credit Agricole’s Kato said. “The economic recovery so far has been brisk.”

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

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