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Japan’s Bond Yields Drop to Lowest Since 2008 as Recovery Slows

Japanese bonds rose, pushing 10-year yields to the lowest level since December 2008, as signs the global economic recovery is faltering boosted demand for government debt.

Benchmark bonds advanced for a second day as Asian stocks extended a global decline in equities before a report that economists said will show U.S. home sales slumped the most in 16 years. Bond futures climbed to a two-week high after the government said yesterday it aimed to balance its books within 10 years, restrict debt sales and overhaul the tax system.

“It’s just a matter of time before we see economies around the world slow as nations focus on austerity,” said Koji Ochiai, chief market economist in Tokyo at Mizuho Investors Securities Co., a unit of Japan’s second-largest bank. “Yields now seem likely to drop further than I previously expected.”

The yield on the 1.3 percent bond due June 2020 fell two basis points to 1.17 percent as of 3:45 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price rose 0.180 yen to 101.161 yen. The yield dropped to 1.160 percent, the lowest since Dec. 30, 2008.

Ten-year bond futures for September delivery gained 0.10 to 140.92 at the afternoon close on the Tokyo Stock Exchange. They earlier rose to 141.05, the highest for a benchmark contract since June 9. The Nikkei 225 Stock Average fell 1.9 percent.

Ten-year yields may drop to 1.10 percent by the end of September, Mizuho’s Ochiai said. If his forecast proves accurate, investors who bought the securities today would make a 0.9 percent return, Bloomberg calculations show.

Slowing Recovery

Sales of U.S. new homes declined 19 percent to an annual pace of 410,000 in May, the biggest drop since January 1994, according to a Bloomberg News survey before today’s report. Purchases of U.S. existing houses fell 2.2 percent to a 5.66 million rate last month, the National Association of Realtors said yesterday.

The Federal Reserve will keep its benchmark interest rate in a range between zero and 0.25 percent at a two-day policy meeting ending today, according to all 97 economists in a separate Bloomberg survey.

Bonds extended gains from yesterday when the government said Japan would cap annual spending at 71 trillion yen ($785 billion) over the next three years.

“The government is at least tackling fiscal issues, which is an improvement after avoiding talk of fiscal rehabilitation and a consumption tax increase,” said Naomi Hasegawa, a senior debt strategist in Tokyo at Mitsubishi UFJ Morgan Stanley Securities Co., a unit of Japan’s largest lender by assets. “That should give some confidence to bond investors.”

The Ministry of Finance will sell 2.6 trillion yen of two-year notes tomorrow. The previous two-year auction in May drew bids for 3.68 times the amount on offer, down from a so-called bid-to-cover ratio of 4.73 in April.

Japan’s government bonds have handed investors a return of 1.5 this year, according to indexes compiled by Bank of America Corp.’s Merrill Lynch unit.

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