Japan's Bonds Rise, Send Yields to Two-Week Low, Amid Europe Debt Concern

Japanese bonds rose, pushing benchmark yields to the lowest this month, as concern that Europe’s debt crisis will hinder growth spurred demand for the relative safety of debt.

Ten-year futures gained for a fourth day after costs to protect Greece’s bonds from nonpayment surged to a record last week and ahead of data that may show European consumer confidence worsened this month. Japan’s government today repealed a planned tax cut on gasoline to help pay for rebuilding from the nation’s biggest earthquake, easing concern the costs would be financed with new debt issuances.

“There’s persistent demand for Japanese bonds,” said Takeshi Minami, chief economist in Tokyo at Norinchukin Research Institute Co., a unit of Japan’s biggest lender for farmers and fishermen. “The world’s economy is undoubtedly coming to a fairly challenging situation with a chance that higher oil prices will damp growth.”

The yield on the 10-year bond fell 3.5 basis points to 1.25 percent as of 3:29 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1.3 percent security due March 2021 added 0.309 yen to 100.440 yen. The yield is at the lowest since March 31.

Ten-year bond futures for June delivery gained 0.26 to 139.36 at the 3 p.m. close of the Tokyo Stock Exchange.

Europe Concern

The cost of insuring Greek government debt reached an all- time high on April 15, with the contracts indicating investors see a greater than 60 percent chance the nation will default within five years. Greece received a bailout from the European Union and the International Monetary Fund last year, and was followed by Ireland and Portugal in seeking aid.

“Demand for bonds is resilient because of weakening expectations globally for economic recovery and Europe’s debt problem,” said Satoshi Yamada, who helps oversee about $12 billion as manager of fixed-income trading at Okasan Asset Management Co. in Tokyo.

An index of household sentiment in the 17-nation euro area dropped to a three-month low of minus 11 in April, according to a Bloomberg survey of economists before today’s European Commission data.

Treasury 10-year yields slid nine basis points on April 15 after the Labor Department said the consumer-price index excluding food and energy rose 0.1 percent in March, less than the 0.2 percent increase forecast by economists.

‘Countless Factors’

Japanese bonds also gained on speculation the economy will struggle to recover from the magnitude-9 earthquake and tsunami on March 11. Sixty-nine percent of people in Japan would accept a tax increase to finance the post-quake reconstruction efforts, the Nikkei newspaper reported, citing a survey taken between April 15 and 17.

“There are countless factors for the economy to worsen,” Shinji Nomura, chief debt strategist in Tokyo at SMBC Nikko Securities Inc., wrote in a note to clients today. “I recommend bargain hunting with 10-year yields at a range of between 1.3 percent and 1.35 percent.”

Finance chief Yoshihiko Noda agreed with members of his tax panel this morning to “temporarily freeze” a measure that would cut levies if gasoline exceeds 160 yen ($1.93) per liter for three straight months, Vice Finance Minister Fumihiko Igarashi told reporters in Tokyo today.

Prime Minister Naoto Kan is seeking ways to pay for damages from the disaster that his government estimates may swell to 25 trillion yen without blowing out the world’s largest public debt burden.

Flattening Curve

Ten-year yields will drop to 1.2 percent by the end of September, according to analyst forecasts compiled by Bloomberg.

The extra yield investors demand to hold 10-year debt instead of two-year notes shrank to 1.05 percentage points from an 11-month high of 1.13 percentage points on April 12, data compiled by Bloomberg show.

The flattening of the so-called yield curve “indicates longer-maturity bonds were undervalued,” Norinchukin’s Minami said. A yield curve is a graph which charts the rates of bonds of a similar type with different maturities. It flattens when yields on shorter-dated debt rise, those on longer-dated bonds fall, or when both occur at the same time.

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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