Japan’s government bonds fell after the nation’s sovereign credit rating was downgraded by Standard & Poor’s, the first cut since 2002.
Benchmark 10-year bonds erased gains and the yen slid after the decision added to concerns Prime Minister Naoto Kan hasn’t done enough to curb the world’s largest debt load. Bonds had advanced earlier after a 2.6 trillion yen ($31.7 billion) sale of two-year notes attracted the highest demand since October.
“The S&P downgrade wasn’t a big surprise considering the state of Japan’s finances,” said Makoto Yamashita, chief interest-rate strategist at Deutsche Securities Inc. in Tokyo. “There was some bond futures selling after the yen dropped.”
Ten-year yields rose 1.5 basis points to 1.25 percent as of the 6:05 p.m. market close in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1.2 percent security due December 2020 declined 0.131 yen to 99.560 yen.
Ten-year bond futures for March delivery fell to 139.55 at the Singapore Exchange, down from the closing level of 139.78 at the Tokyo Stock Exchange.
Japan’s debt is now ranked AA-, the fourth-highest level and alongside China, by S&P. The reduction from AA was announced by S&P in a statement today.
“My impression is that the decision to downgrade was a bit fast,” said Koji Shimamoto, chief strategist in Tokyo at BNP Paribas SA. “The move will be a sell-factor for bonds, but it won’t lead to a broad selloff. The government’s response will be more important.”