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Japan's Government Bonds Gain Most in 11 Months on Outlook for More Easing

Japanese bonds rose, completing their biggest rally in 11 months, on speculation the yen’s strength will prompt the central bank to expand debt purchases.

Benchmark 10-year yields dropped to a new seven-year low after Bank of Japan Governor Masaaki Shirakawa said the central bank may increase the size of a fund it’s setting up to buy government debt and other assets. The yen appreciated to near a 15-year high, even after the BOJ introduced what it called “comprehensive” easing measures.

“The yen is prone to appreciate with central banks globally inclined to monetary easing,” said Keiko Onogi, a fixed-income strategist in Tokyo at Daiwa Securities Capital Markets Co. “Given that, Japan has no choice but to steer toward easing. Ten-year yields still have room to fall and may sink below 0.8 percent by the year-end.”

The yield on the benchmark 10-year bond fell six basis points to 0.835 percent as of 3:10 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1 percent security due September 2020 rose 0.555 yen to 101.514 yen. Yields dropped to as low as 0.82 percent, the least for a benchmark 10-year bond since July 1, 2003. Today’s decline in yield was the steepest since Nov. 12.

Ten-year bond futures for December delivery gained 0.48 to 144.15 in Tokyo, the highest close since June 2003.

Benchmark yields reached a record low of 0.43 percent on June 11, 2003, after the BOJ said it would buy corporate debt. The yield climbed to 1.94 percent in 2004.

Longer Duration

The Bank of Japan yesterday cut its benchmark interest rate to a range of zero to 0.1 percent, from a level of 0.1 percent previously. The BOJ will set up a 5 trillion yen ($60 billion) fund to buy government debt, exchange-traded funds and real- estate investment trusts, it said in a statement.

The central bank said it will keep the “virtually zero interest rate policy” until it decides that “price stability is in sight.” The BOJ board considers prices stable when they are in a positive range of up to 2 percent, with a median of 1 percent, the statement said.

“The risk of rising interest rates won’t be in sight for quite some time,” said Susumu Kato, chief economist in Tokyo for Japan at Credit Agricole CIB and CLSA. “That’s leading investors to extend the duration of their portfolios.”

Duration is a measure of the sensitivity of a bond’s price to changes in interest rates. Bonds with longer durations have greater price decreases for each incremental rise in yield than bonds with shorter durations.

Auction Tomorrow

The yen touched 82.96 yesterday, the strongest since Sept. 15. Japan intervened to weaken its currency that day for the first time since 2004 after the yen reached 82.88, the highest level since May 1995. A stronger yen reduces the value of overseas sales at Japanese companies when repatriated.

“As measures against the yen’s strength aren’t taking effect, speculation persists that the Bank of Japan will expand the scale of asset purchases,” said Takehito Yoshino, chief fund manager at Mizuho Trust & Banking Co. in Tokyo. “Catalysts for the bond market have yet to run out.”

The Federal Reserve, which will meet next month, said in a policy statement on Sept. 21 that it’s prepared “to provide additional accommodation if needed to support economic recovery.” The U.S. central bank snapped up $300 billion of Treasuries last year, and said in August it would reinvest proceeds from maturing mortgage holdings into government debt.

“The Fed is likely to introduce more easing measures in November or December,” said Eiji Dohke, Tokyo-based chief strategist for Japanese government bonds at Citigroup Inc. “There is no end in sight to the easing competition.”

Japan’s Ministry of Finance will sell 2.2 trillion yen of 10-year bonds tomorrow.

“Given the market is so resilient today, we can’t rule out the possibility that the coupon will be set at 0.8 percent at tomorrow’s auction,” said Daiwa’s Onogi.

The Ministry of Finance set a coupon of 1 percent at the last 10-year sale on Sept. 1.

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

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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