Japan Bonds Post Weekly Loss as Fed Comments Limit Pressure on BOJ to Ease

Japanese bonds completed a second weekly loss as U.S. policy makers mulled whether another round of debt purchases was necessary, reducing pressure on the Bank of Japan to ease monetary policy further.

Ten-year yields climbed to the highest in two weeks as stocks advanced before a report next week forecast to show U.S. existing home sales increased last month. Federal Reserve policy makers said this week more Treasury purchases may not be needed. The BOJ next meets on Oct. 28.

“I don’t expect new action by the BOJ this time as I see no new signs of danger looming,” said Junichi Makino, a senior economist at Daiwa Institute of Research Ltd. in Tokyo. “It’s not the time to keep buying bonds.”

The yield on the 0.8 percent bond due September 2020 rose half a basis point to 0.89 percent as of 4:51 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price fell 0.45 yen to 99.181 yen. The yield has risen 1.5 basis points this week.

Ten-year yields earlier increased to 0.9 percent, matching the highest since Oct. 8. A basis point is 0.01 percentage point.

Ten-year bond futures for December delivery declined 0.14 to 143.46 at the afternoon close on the Tokyo Stock Exchange.

The BOJ on Oct. 5 cut its overnight call rate target to a range of zero to 0.1 percent, the lowest level since 2006, from 0.1 percent. Policy makers said they would set up a 5 trillion yen ($61.5 billion) fund to buy government bonds and other assets, expanding the balance sheet.

Fed Outlook

U.S. existing home sales advanced 3.6 percent to a 4.28 million annual pace in September, according to a Bloomberg News survey before the Oct. 25 report.

The Nikkei 225 Stock Average rose 0.5 percent, snapping a two-day decline.

Losses in Japan’s bonds were limited on speculation yields near a two-week high attracted buyers.

“Gains in 10-year yields have been snapped at 0.9 percent a few times, setting up a pattern,” said Katsutoshi Inadome, a strategist in Tokyo at Mitsubishi UFJ Morgan Stanley Securities Co., a unit of Japan’s largest bank. “Yields are likely to remain in a tight range until new factors come up.”

The Federal Open Market Committee meets on Nov. 2-3 and is considering whether to increase government debt purchases to spur growth and keep prices in the economy from falling, a strategy known as quantitative easing.

‘Hard Case’

Richmond Fed President Jeffrey Lacker said Oct. 20 a new round of quantitative easing “would be a hard case to make,” while his Philadelphia counterpart Charles Plosser said he’s “less concerned about deflation risks” than some officials.

“Events in early November such as the Fed meeting and the U.S. mid-term election will be a watershed for bond markets,” said Shinji Nomura, chief debt strategist at Nikko Cordial Securities Inc. in Tokyo. “Investors are poised to buy on dips rather than pushing up bond prices higher.”

Ten-year yields may rise to 1.2 percent by year-end, Nikko’s Nomura said. Should his forecast prove accurate, investors who bought today would make a 2.5 percent loss, according to Bloomberg data.

Japan’s life insurers will buy government bonds dated 20 years or longer in the fiscal year ending in March, easing the steepening of the yield curve, RBS Securities Japan Ltd. said.

Insurers tend to boost purchases of Japanese “super-long” notes and shift to domestic from foreign debt in the second half of the business year, said RuiXue Xu, a strategist at the unit of Royal Bank of Scotland Group Plc. in Tokyo.

Japan’s three biggest insurers -- Nippon Life Insurance Co., Dai-ichi Life Insurance Co. and Meiji Yasuda Life Insurance Co. -- this month said they plan to buy Japanese bonds.

“It’s unlikely the yield curve will steepen further,” Xu said. “It wouldn’t be surprising if relatively cheap super-long bonds will correct, supported by demand from life insurers.”

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

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

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