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Japan’s Bonds May Rise as Europe’s Fiscal Crisis Boosts Demand

Japan’s bonds may rise for a third day as concern that Europe’s fiscal crisis is worsening boosts demand for the relative safety of government debt.

Five-year yields may drop from the lowest level since 2005 after Federal Reserve Governor Daniel Tarullo said yesterday the crisis may pose a threat to the U.S. and world economies as trade shrinks and banks incur losses on European investments. Bonds may also advance as global stocks fell and the yen rose, damping the outlook for Japanese exporters’ earnings.

“Greece’s crisis is showing no sign of slowing,” said Kazuhiko Sano, chief strategist in Tokyo at Citigroup Global Markets Japan Inc. “Bonds today will rise.”

Ten-year bond futures for June delivery traded at 140.47 in London from 140.25 at the 3 p.m. close in Tokyo yesterday. The contract will open for trading at 9 a.m. Tokyo time.

The benchmark 10-year bond hasn’t traded yet today at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The yield on the 1.3 percent bond due March 2020 fell three basis points to 1.255 percent yesterday, the lowest since May 7. A basis point is 0.01 percentage point.

The yield may drop to 1.22 percent today, according to Citigroup’s Sano.

Five-year yields dropped 2.5 basis points to 0.42 percent yesterday, the lowest since July 1, 2005.

Nikkei 225 Stock Average futures slid, trading at 9,735 in Chicago from 10,040 in Osaka yesterday. The MSCI World Index fell 2.9 percent yesterday.

Fear Gauge

The Chicago Board Options Exchange SPX Volatility Index, the VIX, rose to as high as 46.37 yesterday, the most since March 20, 2009. The benchmark for U.S. stock options is known as Wall Street’s fear gauge.

The yen reached 109.51 versus euro yesterday, the highest since November 2001. It touched 88.97 against the dollar yesterday, the strongest since May 6.

The Bank of Japan will keep its benchmark rate unchanged at 0.1 percent today at the end of a two-day policy meeting, according to all 14 economists in a Bloomberg survey.

The 1.3 percent bond due in March 2020 closed at 100.39 to yield 1.255 percent yesterday, according to the Bloomberg Yen Bond Fixing Price. The level is an average rate set at 6:30 p.m. in Tokyo by Daiwa Securities Capital Markets Co., Citigroup Global Markets Japan Inc., Mizuho Securities Co. and Mitsubishi UFJ Securities Co.

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