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Japan’s Bonds Rise as Auction Draws Strongest Demand in 3 Years

Japan’s bonds rose for the first time in five days as local stocks fell and today’s auction of 10-year securities drew the strongest demand in three years.

The sale drew bids worth 3.85 times the amount on offer, the most since May 2007. That was up from a so-called bid-to-cover ratio of 3.52 times at the May auction. Bonds also gained as the European Central Bank yesterday warned of more bank losses as the region’s fiscal crisis widens, boosting demand for the relative safety of Japan’s debt.

“The auction went fine with the high bid-to-cover ratio,” said Jun Ishii, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo, a unit of Japan’s largest lender by assets. “Demand among financial institutions with abundant cash, especially banks, continues to be strong.”

The yield on the 1.3 percent bond due March 2020 fell 1.5 basis points to 1.245 percent at 3:20 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price rose 0.132 yen to 100.480 yen. A basis point is 0.01 percentage point.

Ten-year bond futures for June delivery gained 0.02 to 140.43 at the Tokyo Stock Exchange. The Nikkei 225 Stock Average fell 0.6 percent.

Bank Losses

The ECB said in its bi-annual Financial Stability Report that euro area banks may see another 90 billion euros ($110.4 billion) in net writedowns this year on loans and securities. The lenders will need to make provisions for losses of about 105 billion euros next year, which may be even bigger amid “heightened sovereign risks and possible second-round effects of the fiscal consolidation,” the central bank said.

“Investors remain hesitant to switch to riskier assets, as they want to see how Europe’s situation develops and how global economic growth, especially in the U.S., is faring,” said Satoshi Yamada, manager of fixed-income trading at Okasan Asset Management Co. in Tokyo, which manages $10.4 billion in assets. “Japan’s bonds continue to be supported.”

Ten-year yields may drop to 1.2 percent by the end of this month, Yamada said. Should his forecast prove accurate, investors who buy the securities today will make a 0.5 percent return, Bloomberg calculations show.

Gains in bonds may be limited as Japan’s political turmoil revives concern about the nation’s fiscal burden, according to Nikko Cordial Securities Inc.

Political Turmoil

Prime Minister Yukio Hatoyama said today he will do “what’s best for the people of Japan” and consider his political future in the face of plunging approval ratings six weeks before parliamentary elections. Three polls released yesterday showed his approval rating at or below 20 percent and six in 10 voters think he should quit.

“It’s unclear whether the government can present effective strategies for future economic growth and fiscal operations,” Shinji Nomura, chief debt strategist in Tokyo at Nikko Cordial, a unit of Japan’s third-largest banking group, wrote in a note today. “In June, we may see risk premiums added to yields due to fiscal deficits, which have been overshadowed by confusion in global markets.”

Japan’s public debt is approaching 200 percent of gross domestic product, the biggest among the 30-member Organization for Economic Cooperation and Development.

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