Japan's Bonds Fall as Stocks Gain, Benchmark Yields Reach Five-Month High

Japanese bonds fell, pushing benchmark yields to the highest level in five months, as a rally in stocks and optimism the U.S. recovery is gaining momentum damped demand for the safety of government debt.

Ten-year bond futures snapped a three-day gain after Treasuries dropped yesterday and economists said a U.S. report tomorrow will show employers added jobs for a second month. Bonds also declined as the yen traded near a two-month low versus the dollar, improving the outlook for Japanese exporters.

“Expectations are mounting for U.S. jobs data,” said Shinji Nomura, chief debt strategist at Nikko Cordial Securities Inc. in Tokyo. “The yen is trading at the current level, thanks to an optimistic shift in the U.S. economy. Ten-year yields may climb to as high as 1.40 percent by year-end.”

The yield on the 1.2 percent bond due December 2020 that was auctioned yesterday rose three basis points to 1.2 percent as of 3:21 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The yield is at the highest level since June 22.

Ten-year bond futures for December delivery dropped 0.39 to 140.94 at the afternoon close on the Tokyo Stock Exchange.

Should Nomura’s yield forecast prove accurate, investors who buy today will incur a 1.7 percent loss, according to data compiled by Bloomberg.

Stocks, Yen

Demand for debt waned as stocks rallied around the world. The Nikkei 225 Stock Average rose the most in two weeks, advancing 1.8 percent.

The yen traded at 84.11 per dollar today after declining to 84.41 on Nov. 29, the lowest level since Sept. 27. A weaker yen boosts the value of overseas income at Japanese companies when converted into their home currency.

U.S. payrolls rose by 145,000 in November after increasing by 151,000 the previous month, according to a Bloomberg News survey before tomorrow’s Labor Department report.

“U.S. economic data have been good since October as the Federal Reserve tries to boost inflation expectations,” said Makoto Noji, a Tokyo-based strategist at Mizuho Securities Research & Consulting Co., a unit of Japan’s second-largest banking group. Low bond yields “can’t be justified,” he said.

Noji correctly predicted in October that Japan’s 10-year yields would increase to 1.2 percent by the end of the year. The yields have climbed from 0.82 percent on Oct. 6, which was the lowest since July 2003.

The decline in bonds was tempered on speculation 10-year yields at the highest since June will encourage investors to buy.

“When yields approach 1.2 percent, investors may find it a good time to buy bonds on dips, especially new 10-year securities,” Kazuhiko Sano, chief strategist at Tokai Tokyo Securities Co., wrote today in a note to clients.

An auction of 10-year bonds yesterday drew bids for 2.41 times the amount on offer, the lowest so-called bid-to-cover ratio since July 2009.

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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