Japanese bonds rose the most in two weeks on speculation the central bank will ease monetary policy further to counter the strengthening yen.
Ten-year yields dropped from near a five-month high as the yen traded near the strongest in three weeks against the dollar, worsening the outlook for the nation’s exporters. Bonds also gained before a report this week that economists said will show machine orders declined for a second month in October and after U.S. Federal Reserve Chairman Ben S. Bernanke said increased purchases of Treasuries were “possible.”
“What frightens the Bank of Japan the most is the dollar- yen rate,” said Makoto Noji, a Tokyo-based strategist at Mizuho Securities Research & Consulting Co., a unit of Japan’s second- largest bank. “If the yen strengthens beyond 80 per dollar, the central bank will have to expand its asset-purchasing fund, which will be positive for short-term debt.”
The yield on the benchmark 10-year bond fell five basis points to 1.155 percent as of 3:46 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1.2 percent security due December 2020 added 0.448 yen to 100.403 yen.
Today’s decline in yield was the most since Nov. 19. It climbed to 1.205 percent on Dec. 3, the highest since June 22. Ten-year bond futures for December delivery jumped 0.60 to 141.48 at the afternoon close on the Tokyo Stock Exchange.
The yen climbed to 82.53 per dollar on Dec. 3, the highest since Nov. 15, before trading at 82.89 today. A stronger yen reduces the value of overseas sales at Japanese companies when repatriated.
The Bank of Japan cut its key interest rate to a range of zero to 0.1 percent on Oct. 5 and announced purchases of government and corporate debt to lower borrowing costs and counter the rising yen.
The yen has gained 11.6 percent this year in a measure of the currencies of 10 developed nations, the best performer in the group, according to Bloomberg Correlation-Weighted Indexes.
Machine orders, an indicator of capital spending in three to six months, fell 0.1 percent in October after dropping 10.3 percent the previous month, according to a Bloomberg News survey of economists before the Dec. 8 report.
U.S. payrolls increased 39,000 in November, less than the most pessimistic projection of economists surveyed by Bloomberg News, the Labor Department said Dec. 3. The jobless rate rose to a seven-month high of 9.8 percent, the report showed.
“At the rate we’re going, it could be four, five years before we are back to a more normal unemployment rate” of about 5 percent to 6 percent, Bernanke said, according to the transcript of an interview for CBS Corp.’s “60 Minutes” program. Purchases of Treasuries beyond the $600 billion announced last month are “certainly possible,” he said.
“Considering the results of the U.S. job report, this is a time to buy short- to medium-term debt,” Takafumi Yamawaki, Tokyo-based chief rates strategist at JPMorgan Chase & Co., wrote in a report today. Investors should buy five-year notes and call options on 10-year bonds, he said.
The difference in yield between five- and 10-year debt was 76 basis points. It widened to 78 basis points on Dec. 2, the most since Sept. 10. A call option gives holders a right, but not the obligation, to buy an underlying asset.
The gain in bonds was tempered on speculation some investors will cut their holdings to prepare for 3 trillion yen ($36.2 billion) of debt sales this week
The Ministry of Finance will auction 600 billion yen of 30- year bonds tomorrow and 2.4 trillion yen of five-year securities on Dec. 9.
“There will be lots of debt supply this week,” Mizuho’s Noji said. “People are cautious about the results.”
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