Japan's 10-Year Bond Futures Fall, Halt Three-Day Gain, on Fiscal Concerns

Japan’s bond futures fell, halting a three-day gain, on concern the government will boost borrowing to finance reconstruction after the nation’s biggest earthquake.

Investors demanded the highest yield in a year at a 1.1 trillion-yen ($13.6 billion) auction of 20-year government bonds today as Japan’s Self Defense Force helicopters were deployed to drop water on the crippled Fukushima Dai-Ichi power plant today to prevent a nuclear meltdown. Pacific Investment Management Co., which runs the world’s biggest bond fund, predicted Japan’s public debt will increase and consumer prices will rise.

“The higher average yield appears to reflect investors’ demand for a higher risk premium,” said Ayako Sera, a strategist in Tokyo at Sumitomo Trust & Banking Co., which manages about $331 billion in investments. “It’s likely that the government will increase bond issuance.”

Ten-year bond futures for June delivery slid 0.56 to 139.72 at the 3 p.m. close of the Tokyo Stock Exchange.

The 20-year yield dipped half a basis point to 2.07 percent as of 4:17 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 2 percent debt due December 2030 added 0.07 yen to 99.018. Twenty-year yields earlier jumped 8.5 basis points, the biggest increase since Sept. 1. Ten-year yields rose half a basis point to 1.22 percent.

The Nikkei 225 (NKY) Stock Average gained 5.7 percent after having lost 19 percent during the preceding four days.

“There is a backlash against the excessive risk aversion seen recently,” said Shinji Nomura, chief debt strategist at Nikko Cordial Securities Inc. in Tokyo. “For the near term, selling will prevail as a correction for the drop in yields.”

‘Stay on Sideline’

Today’s auction had an average yield of 2.13 percent, the highest since March 16, 2010. An increase in the so-called tail, the difference between the lowest and the average price, showed the fewer bids were clustered around the average price. The bid- to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, rose from the previous auction.

“The higher bid-to-cover ratio doesn’t point to strong appetite at the auction” considering the longer tail, Susumu Kato, chief economist for Japan in Tokyo at Credit Agricole CIB and CLSA. “I’m recommending staying on the sideline, owing to the possibility that the need for government financing will boost long-term bond yields.”

Insurance Companies

Clouds of white smoke or steam rose from reactor buildings following a fire at Dai-Ichi’s No. 4 reactor. Japan Chief Cabinet Secretary Yukio Edano said radiation levels at the plant rose this morning, forcing an evacuation, but have since fallen. About 70 percent of the fuel rods at the plant’s No. 1 reactor and a third of the No. 2 reactor’s fuel may have been impaired, Tokyo Electric Power Co. said.

“We know that inflation will spike because of shortages and because of supply chain disruptions,” Mohamed El-Erian, chief executive officer at Pimco, said about Japan in a telephone interview on “Bloomberg Surveillance” with Tom Keene. “We know that the deficit and public debt are going to increase significantly.”

Bonds also fell amid concern insurance companies will sell Japanese government debt to pay for claims.

Naka Matsuzawa, chief rates strategist for Nomura in Tokyo, has calculated that the maximum amount of money that Japanese non-life insurers will have to pay is 1.2 trillion yen, strategists, including Yunosuke Ikeda, a senior economist and currency analyst at Nomura Securities Co., wrote in a report yesterday. “Insurance companies are likely to raise cash primarily through liquidation of shorter-term JGBs,” the report said.

To contact the reporter on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net.

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

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.