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Japan Bond Futures Touch 2-Year High on Slowing Recovery Signs

Japanese bond futures traded near a two-year high after reports showed the nation’s retail sales grew at the slowest pace since January and the U.S. economy expanded at a lower rate than previously estimated.

Ten-year yields were near the lowest level since 2003 before a report tomorrow that economists said will show Japan’s industrial production was unchanged in May, signaling the nation’s economic recovery is dimming. Demand for longer-maturity bonds may rise on speculation money managers will buy the securities to match an index used to gauge performance.

“The global outlook is deteriorating as market participants try to grasp how Europe’s fiscal crisis will harm economies,” said Akito Fukunaga, Tokyo-based chief rates strategist at Royal Bank of Scotland Group Plc. “Yields will struggle to rise.”

Ten-year bond futures for September delivery rose 0.04 to 141.10 at 9:35 a.m. in Tokyo. They earlier rose to 141.19, matching the highest for a benchmark contract since March 2008.

The yield on the 1.3 percent bond due June 2020 was unchanged at 1.145 percent at Japan Bond Trading Co., the nation’s largest interdealer debt broker. Ten-year yields touched 1.125 percent on June 24, the lowest since August 2003.

Ten-year yields may drop to 1 percent by the end of September, Fukunaga said. If his forecast proves accurate, investors who buy the securities today will make a 1.6 percent return, Bloomberg data show.

Slowing Recovery

The Commerce Department said on June 25 that U.S. gross domestic product expanded at a 2.7 percent annual rate in the first quarter, smaller than the median forecast of 79 economists in a Bloomberg News survey and compared with a 3 percent estimate issued last month. Ten-year Treasury yields fell 11 basis points last week. A basis point is 0.01 percentage point.

Japanese retail sales advanced 2.8 percent in May from a year earlier, the Trade Ministry said today in Tokyo. The gain was slower than the 4.8 percent median estimate of 14 economists surveyed by Bloomberg News.

The nation’s factory output last month was unchanged after rising 1.3 percent in April, according to a separate survey before the Ministry of Economy, Trade and Industry releases the data tomorrow.

“The data may be weaker than expected and add to signs that the economic recovery is beginning to stall,” Tetsuya Miura, chief market analyst in Tokyo at Mizuho Securities Co., wrote in a research note today. “Investor focus this week may switch to economic reports, which are unlikely to initiate selling of bonds.”

Nomura Securities Co. increased the average duration of its Bond Performance Index by 0.06 year to 6.75 years for July.

Money managers such as Japan’s Government Pension Investment Fund, which runs the world’s largest pool of retirement wealth, use indexes such as Nomura’s to help decide their holdings. Duration is a gauge of how much a change in yield affects a bond’s price.

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