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Japan’s Bonds Gain as Europe’s Debt Crisis Boosts Safety Demand

Japan’s bonds gained for a second day as Europe’s sovereign crisis boosted demand for the relative safety of government debt.

Five-year yields touched the lowest level since December as European Central Bank President Jean-Claude Trichet called for a “quantum leap” in policy making to help stamp out the bloc’s sovereign debt crisis. The euro today fell to its weakest level since April 2006. Bonds also rose as Asian stocks extended a drop in global equities.

“People are worried about a slowdown of the economic recovery in Europe and elsewhere” said Takafumi Yamawaki, a senior strategist in Tokyo at BNP Paribas Securities Japan Ltd., a unit of France’s largest bank. “The euro’s weakness against the yen may weigh on Japan’s exporters, pushing down stocks. As a result, market participants are buying government bonds.”

The yield on the 0.5 percent bond due March 2015 fell one basis point to 0.445 percent as of 4:10 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price rose 0.048 yen to 100.26 yen. The yield touched 0.44 percent, the lowest since Dec. 22.

Ten-year bond futures for June delivery rose 0.17 to 140.02 as of the afternoon close at the Tokyo Stock Exchange.

Ten-year yields dropped 1.5 basis points to 1.28 percent, the least since May 7. A basis point is 0.01 percentage point.

They may fall to 1.25 percent by the end of June, according to BNP Paribas’ Yamawaki. Should his forecast prove accurate, investors who buy the securities today would get a 0.4 percent return, Bloomberg calculations show.

The euro reached $1.2235, the weakest since April 18, 2006. It touched 112.46 yen, the lowest since May 6.

Trichet Comment

“There is a need for a quantum leap in the governance of the euro area,” Trichet said in an interview with German news weekly Der Spiegel. “There needs to be major improvements to prevent bad behavior, to ensure effective implementation of the recommendations made by peers and ensure real and effective sanctions in the case of breaches.”

The Nikkei 225 Stock Average fell 2.2 percent and the MSCI Asia Pacific Index of regional shares declined 2.7 percent. The Standard & Poor’s 500 Index dropped 1.9 percent on May 14.

“Concern about Europe’s financial situation remains very strong,” said Kazuhiko Sano, chief strategist in Tokyo at Citigroup Global Markets Japan Inc. “That should push down or keep a lid on yields of Japan’s government bonds.”

Five-Year Auction

Gains in bonds were limited on prospects primary dealers cut debt holdings before tomorrow’s auction of five-year notes.

“Resistance for a 0.4 percent coupon at tomorrow’s auction is strong,” Akihiko Inoue, chief market analyst in Tokyo at Mizuho Investors Securities Co., a unit of Japan’s second-largest bank, wrote in a research note today.

The Ministry of Finance will sell 2.4 trillion yen ($26 billion) of five-year notes. The prior five-year sale on April 15 drew bids worth 4.65 times the amount on offer, compared with a so-called bid-to-cover ratio of 3.08 at the March sale.

Primary dealers, which are required to bid at government debt sales, often reduce holdings of bonds in case prices decline before they can pass on the new securities to investors.

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