Japan's Bonds Fall Before 10-Year Auction, Yields Increase to 12-Week High

Japan’s 10-year bonds fell, completing their biggest monthly loss since April 2008, on speculation investors cut their holdings to prepare for an auction of benchmark securities tomorrow.

Ten-year yields climbed to the highest level in 12 weeks before a U.S. report tomorrow that economists said will show employers added jobs for a second month. Today’s decline in debt may prompt the government to increase the coupon at tomorrow’s 2.2 trillion yen ($26 billion) auction from 1 percent at the previous sale.

“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 yield on the 1 percent note due September 2020 climbed 1.5 basis points to 1.19 percent as of 3:10 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price fell 0.130 yen to 98.332 yen. The yield earlier increased to 1.195 percent, the highest since Sept. 6. Ten-year yields have risen 27 basis points this month.

Ten-year bond futures for December delivery gained 0.02 to 140.87 at the afternoon close on the Tokyo Stock Exchange. The contracts fell to 140.41 yesterday, the lowest since June 17.

Debt Sale

The previous 10-year sale on Nov. 2 drew bids for 3.91 times the amount on offer, compared with a so-called bid-to- cover ratio of 2.85 at the October offering.

Primary dealers, companies that are required to bid at government debt sales, often reduce holdings of bonds before an auction in case prices decline before they can pass on the new securities to investors.

U.S. companies added 72,000 jobs this month after hiring 43,000 workers in October, according to a Bloomberg News survey before the report from ADP Employer Services tomorrow.

The decline in debt was tempered as Japanese reports today showed industrial production dropped for a fifth month and the unemployment rate increased.

Factory output fell 1.8 percent in October, after dropping 1.6 percent in the prior month, the Trade Ministry said. The jobless rate climbed to 5.1 percent last month from 5 percent in September, a statistics bureau report showed.

The production 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.”

Five-year yields fell 1.5 basis points to 0.445 percent after rising to 0.47 percent yesterday, the highest since May 12.

-- With assistance from Yumi Ikeda in Tokyo. Editors: Nicholas Reynolds, Nate 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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