Japanese Bonds Fall, Yields Approach 4-Week High on Weaker Yen, U.S. Jobs

Japan’s 10-year bonds fell, pushing yields toward a four-week high, as the yen’s slump to a six- month low and prospects for an improving U.S. job market reduced demand for the safety of government debt.

Bond futures dropped for the first time this week as the yen failed to gain for a 10th day against the dollar, supporting the earnings outlook for exporters. The extra yield investors demand to hold two-year Treasuries instead of similar-maturity Japanese notes has tripled in the past five months amid signs the U.S. economy is gaining momentum.

“With the rising yields in the U.S., a continued weakening of the yen will prompt investors to take a fresh look at Treasury investment because it brings a far higher return,” said Susumu Kato, chief economist for Japan in Tokyo at Credit Agricole CIB and CLSA. “I’m bearish” on Japanese bonds.

The 10-year yield increased three basis points to 1.295 percent as of 3:25 p.m. at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1.3 percent security due March 2021 fell 0.265 yen to 100.044 yen. The yield reached 1.305 percent yesterday, the most since March 10.

Ten-year bond futures for June delivery dropped 0.29 to 138.98 at the 3 p.m. close of the Tokyo Stock Exchange.

The yen fell to as low as 85.53 per dollar today, the lowest level since Sept. 21. A weaker local currency makes Japanese products cheaper outside the country and boosts the value of exporters’ overseas earnings when repatriated.

‘Risk On’

“The yen’s substantial weakening against the dollar results from expectations for a global economic recovery and risk-on market sentiment,” Makoto Noji, a senior debt and foreign-exchange strategist at SMBC Nikko Securities Inc. in Tokyo, wrote in a report today. “A weaker yen is emerging as a new selling catalyst for bonds.”

The number of Americans filing for unemployment benefits dropped by 3,000 last week to the lowest in more than a month, according to a Bloomberg survey of economists before the Labor Department report tomorrow.

The yield spread between two-year Treasuries and Japanese government notes with a similar maturity was 60 basis points today, compared with a low of 18 basis points on Nov. 3. A basis point is 0.01 percentage point.

End to Stimulus?

Ten-year Treasury yields were little changed after rising six basis points to 3.48 percent in New York. Minutes released yesterday of the Federal Reserve’s last meeting showed policy makers differed over whether to begin removing stimulus measures after a $600 billion bond-purchase program ends.

“A few participants indicated that economic conditions might warrant a move toward less-accommodative monetary policy this year,” the Fed’s Open Market Committee said in minutes of its March 15 meeting. “A few others noted that exceptional policy accommodation could be appropriate beyond 2011.”

Losses in bonds were tempered on bets the Bank of Japan will maintain its easing stance to aid the nation’s recovery from a March 11 earthquake that triggered a deadly tsunami and radiation leaks at a power plant north of Tokyo.

BOJ Governor Masaaki Shirakawa and his policy board started a two-day meeting in Tokyo today. The central bank is considering offering a credit program to encourage banks to lend to companies with cash-flow shortages, people familiar with the matter told Bloomberg News.

“Because it’s unimaginable the Bank of Japan will tighten monetary policy, there is confidence that shorter bond yields won’t rise,” said Ayako Sera, a strategist in Tokyo at Sumitomo Trust & Banking Co., which manages about $331 billion in assets.

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.

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