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Japan’s Bond Futures Rise as Yen Near 5-Week High, Stocks Fall

Japan’s bond futures rose for a fourth day as the yen traded near a five-week high against the dollar and Asian stocks fell, boosting demand for safer assets.

Bonds headed for the biggest weekly gain since November as a report showed Japan’s consumer prices fell in May for a 15th-consecutive month, adding to signs economic recovery is slowing. Bond futures also gained before a report next week forecast to show Japan’s industrial production was unchanged last month.

“Optimism is fading about the global economic recovery,” said Katsutoshi Inadome, a strategist in Tokyo at Mitsubishi UFJ Morgan Stanley Securities Co., a unit of Japan’s largest banking group. “Investors who’d thought yields would go up in June are playing catch-up and buying before the second quarter ends.”

Ten-year bond futures for September delivery gained 0.09 to 141.15 as of 2:12 p.m. at the Tokyo Stock Exchange.

The yield on the 1.3 percent bond due June 2020 rose half a basis point to 1.13 percent in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price fell 0.046 yen to 101.523 yen. The yield has fallen seven basis points this week, the most since Nov. 13.

Ten-year yields reached 1.125 percent yesterday, the lowest since Aug. 18, 2003. A basis point is 0.01 percentage point.

The yen touched 89.23 per dollar yesterday, the strongest since May 21. The Nikkei 225 Stock Average fell 2.1 percent. The Nikkei 225 and 10-year yields had a correlation of 0.7 in the past month, according to data compiled by Bloomberg. A value of 1 would mean the two moved in lockstep.

Lingering Deflation

“As the yen has risen gradually since early June and stocks struggle to advance, bonds are unlikely to be sold much,” Tetsuya Miura, chief market analyst in Tokyo at Mizuho Securities Co., wrote in a research note today. “It’s hard to see what will reverse the trend for bonds.”

Japan’s consumer prices excluding fresh food slid 1.2 percent from a year earlier in May, the statistics bureau reported today. Deflation enhances the value of the fixed payments on debt.

The nation’s factory output was unchanged after rising 1.3 percent in April, according to economists in a Bloomberg News survey before the Ministry of Economy, Trade and Industry releases the data on June 29.

Gains in bonds were limited on speculation the lowest yields since 2003 will discourage investors from buying the securities. Ten-year yields’ 14-day relative strength index fell to 29.5 yesterday, below the 30 threshold that some traders see as a sign the rate is poised to reverse its declines.

“Yields are bound to go up somewhat as investors finish buying at the end of the second quarter,” said Osamu Koizumi, Tokyo-based chief investment officer in Tokyo at Yasuda Asset Management Co., which manages about $7.6 billion. “People are buying bonds not because they want to, but because they don’t have an alternative. There’s no reason to expect 10-year yields to go to 1.1 percent or 1 percent.”

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