Japan's Five-Year Notes Gain as Factory Output Falls, Jobless Rate Rises

Japan’s five-year notes rose as data showed the nation’s industrial production dropped for a fifth month and the jobless rate increased, adding to signs an economic recovery is losing momentum.

Five-year Japanese government bond yields retreated from a the highest since May amid concern an 85 billion-euro ($111.6 billion) bailout for Ireland won’t keep Europe’s debt crisis from spreading, spurring demand for safer assets. Japan’s 10- year yields rose to a 12-week high on speculation investors reduced their debt holdings to prepare for tomorrow’s auction of 10-year securities. The spread in yield between five- and 10- year debt increased to the widest level in nine weeks.

Japan’s factory output data “confirmed a rapid slowdown in the economy toward year-end, which is not a sell factor for bonds,” said Akito Fukunaga, chief rates strategist in Tokyo at Royal Bank of Scotland Group Plc, Britain’s biggest government- owned bank. “As Europe’s contagion risks get bigger, that could prompt flight to quality. JGBs may be supported given their yields are at an attractive level.”

The yield on the 0.3 percent note due September 2015 fell 1.5 basis points, or 0.015 percentage point, to 0.445 percent at the 11:05 a.m. break in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price rose 0.07 yen to 99.318 yen. Five-year yields reached 0.47 percent yesterday, the highest since May 12.

Ten-year bond futures for December delivery dropped 0.09 to 140.76 at the Tokyo Stock Exchange. The contracts touched 140.41 yesterday, the lowest since June 17.

Ten-year yields gained 1.5 basis points to 1.19 percent, matching the highest since Sept. 6. They have risen 27 basis points this month, the biggest monthly advance since April 2008.

Factory Output

Japan’s factory output fell 1.8 percent in October after dropping 1.6 percent in September, the government reported today. The median estimate of economists surveyed by Bloomberg News was a 3.2 percent drop. The nation’s jobless rate climbed to 5.1 percent in October from 5 percent in September, another report showed.

Demand for bonds was limited before the Ministry of Finance sells 2.2 trillion yen ($26.1 billion) of 10-year bonds tomorrow. The prior 10-year sale on Nov. 2 drew bids worth 3.91 times the amount on offer, compared with a so-called bid-to- cover ratio of 2.85 at the October sale.

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.

“Investors find it hard to make big moves before tomorrow’s 10-year sale, and that’s limiting upward momentum” for bonds, said Akitsugu Bandou, a senior economist in Tokyo at Okasan Securities Co. “The current yield level suggests the coupon for the securities will be 1.2 percent.”

The spread in yield between five- and 10- year debt expanded to 74 basis points today, the widest level since Sept. 23.

-- With assistance from Yumi Ikeda in Tokyo. Editors: Rocky Swift, Jonathan Annells, Naoto Hosoda

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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