Japan Bonds Post 4th Weekly Gain on Monetary Easing Speculation

Japanese government bonds completed a fourth weekly advance amid speculation the central bank will ease monetary policy further to counter the yen’s gain.

The benchmark 10-year yield sank to a four-month low after the yen strengthened beyond 80 per dollar for the first time in seven weeks, rekindling concern the local currency’s advance will erode exporters’ earnings. The Ministry of Finance is scheduled to sell 2.2 trillion yen ($27 billion) in 10-year bonds on May 12 and release reports on overseas investors’ transactions in Japanese securities for March.

“There isn’t a catalyst in the market that causes investors to be bearish on bonds,” said Akitsugu Bandou, a senior economist in Tokyo at Okasan Securities Co., one of the 24 primary dealers obliged to bid at government debt sales. Additional easing by the Bank of Japan is “likely and will be a psychological support for the bond market.”

The 10-year yield fell six basis points to 1.14 percent this week in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1.3 percent security due March 2021 added 0.536 yen to 101.417 yen. The yield was at the lowest since Jan. 5. A basis point is 0.01 percentage point.

Five-year yields declined 4.5 basis points to 0.42 percent this week. They slid to 0.415 percent yesterday, also the least since Jan. 5. Japan’s financial markets were closed for the three days through May 5 for national holidays.

Ten-year futures for June delivery jumped 0.70 to 140.75 this week at the Tokyo Stock Exchange.

Yield Spread

The difference in yield between 10-year Treasuries and similar-dated Japanese government bonds shrank to 1.94 percentage points on May 5, the narrowest since Dec. 9, increasing the allure of yen-denominated debt.

The yen gained to 79.57 per dollar on May 5, rising beyond 80 for the first time since March 18, the day after it touched a postwar record of 76.25. A stronger local currency reduces the value of overseas sales at Japanese exporters when repatriated.

Bank of Japan Deputy Governor Kiyohiko Nishimura proposed expanding the asset-purchase program last month to cope with the earthquake in March, which was voted down by the other eight members. Kazuhiko Sano, chief strategist at Tokai Tokyo Securities Co., said it was increasingly likely the central bank will buy more assets after Nishimura’s proposal.

“For 10-year yields to fall below 1 percent, additional monetary easing, namely increased buying of government bonds, is necessary,” Sano wrote in a report yesterday. “Before the April 28 policy meeting, I saw a chance of about 50 percent for such a measure,” and the odds are now 70 to 80 percent, he said.

Flight to Safety

Japan’s bonds with a maturity of between one and 10 years have returned 0.1 percent this year, according to an index compiled by Bank of America Merrill Lynch. That compares with a 3.6 percent drop in the Nikkei 225 (NKY) Stock Average.

Risk aversion is causing a flow of funds to bonds,” said Kazuya Ito, a fund manager at Daiwa SB Investments Ltd. in Tokyo, which oversees the equivalent of $57 billion.

The previous sale of 10-year bonds on April 5 attracted bids for 3.97 times the amount on offer, compared with an average of 3.18 for the past 10 auctions. The debt carried a coupon of 1.3 percent.

“We want a coupon of at least 1.2 percent for 10-year bonds” at next week’s sale, Okasan’s Bandou 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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