Japan’s 10-Year Bond Yields Touch 6-Week Low on Policy Outlook

Japan’s 10-year bond yields touched a six-week low on speculation the central bank will add to monetary easing to contain the yen’s appreciation.

Bond futures gained for a fourth day after the yen climbed to the highest level against the dollar since March, clouding the earnings outlook for Japanese exporters. Demand for the relative safety of government debt weakened after U.S. President Barack Obama said al-Qaeda leader Osama bin Laden had been killed, spurring crude oil to fall and easing concern higher commodity prices will slow the global economic recovery.

“Yields are expected to stay low,” said Toshiyuki Kurabayashi, assistant manager in Tokyo at the bond division of Mitsubishi UFJ Asset Management Co., a unit of Japan’s largest listed lender by assets. “There are prospects that the Bank of Japan will reinforce its accommodative monetary stance.”

The 10-year yield rose half a basis point to 1.205 percent as of 3:13 p.m. in Tokyo, at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1.3 percent security due March 2021 fell 0.044 yen to 100.837 yen. The yield earlier slid to 1.190 percent, the lowest level since March 17.

Ten-year bond futures for June delivery advanced 0.05 to 140.10 at the 3 p.m. close of the Tokyo Stock Exchange. The MSCI Asia Pacific Index of regional shares jumped 0.7 percent.

The yen rose as high as 81 per dollar today, the strongest since March 25. A stronger yen reduces the value of overseas earnings at Japanese exporters when repatriated.

‘Severe’ Outlook

The extra yield investors demand to hold two-year U.S. Treasuries over similar-maturity Japanese government notes fell to 40 basis points on April 29, the least since March 18, reducing the allure of dollar-denominated assets.

A stronger yen boosts “speculation the Bank of Japan will have to take some steps,” said Makoto Noji, a senior bond and foreign-exchange strategist in Tokyo at SMBC Nikko Securities Inc., one of the 24 primary dealers obliged to bid at government debt sales. Additional monetary easing “would be supportive for medium-term debt.”

Japanese government bonds with a maturity of between one and 10 years have handed investors a return of 0.1 percent this year, compared with a 0.3 percent drop in the broader market, according to indexes compiled by Bank of America Merrill Lynch.

BOJ Governor Masaaki Shirakawa said April 30 the economic outlook is “severe” after the central bank cut the nation’s growth forecast. The economy will “inevitably continue to face strong downward pressure” because of the March 11 earthquake, the BOJ said in a report on April 28.

Bin Laden’s Death

Japan’s monthly wages slid in March for the first time in 13 months, declining 0.4 percent from a year earlier to 274,886 yen ($3,373), a report from the Labor Ministry showed today.

Bond futures trimmed earlier advances after Obama said bin Laden was killed in a U.S. operation. Crude oil declined as much as 1.5 percent in New York, while the 10-year Treasury yield gained two basis points.

The report on Bin Laden’s death is “leading to speculation tension in the Middle East will ease, spurring crude oil to decline,” said Akito Fukunaga, the chief rates strategist at the brokerage unit of Royal Bank of Scotland Plc in Tokyo. “Speculation the downside risk to the economy derived from higher oil prices will dissipate is prompting investors to buy stocks,” reducing demand for bonds.

The 14-day relative-strength index for 10-year yields sank to 39 today, nearing the 30 threshold that some traders see as a signal the yields have fallen too rapidly and may change course.

“Ten-year yields are close to rebounding,” Fukunaga 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.

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