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Japan Spreads to Hit Year Low on Kan, Floor: Technical Analysis

The yield spread on longer-term Japanese debt may narrow to a year low after the government’s pledge to reduce borrowing helped send 10-year rates below the key 1.2 percent level, Mizuho Investors Securities Co. said, citing trading patterns.

Benchmark 10-year yields touched 1.16 percent today, the lowest since December 2008. Historical data show the 1.2 percent level serves as a floor, limiting declines, said Akihiko Inoue, chief strategist at the unit of Japan’s second-largest bank.

“With little room left for 10-year yields to decline, demand may shift to the super-long zone, narrowing the spread,” Inoue said.

The difference between 10- and 20-year yields widened to 85.4 basis points on Dec. 17, before declining to a low of 71.5 on April 8, Bloomberg data show. The gap has been in a range of 70 to 80 in the past three months and was at 77 yesterday.

There’s more room for super-long yields to drop compared with medium- to long-term zones, Inoue said. Since 2000, the spread between 10- and 20-year rates averaged about 60 basis points, so 20-year bonds are looking cheaper, he said. The spread is likely to return to the 60-65 basis point range, a level not seen since June 2009, according to the strategist.

Prime Minister Naoto Kan pledged yesterday to balance the budget in 10 years and reduce bond sales in an effort to tackle the nation’s record debt. The plan is easing concern the nation’s risk premium will widen, prompting demand for super-long bonds, Inoue said.

Annual spending will be capped at 71 trillion yen ($781 billion) over the next three years and tax changes will be unveiled “soon,” the government said in its fiscal strategy released in Tokyo yesterday. Kan last week said the government will consider an increase in the country’s 5 percent sales tax.

In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in a security, commodity, currency or index.

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