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Japan’s Bond Futures Gain Most in a Month on Libya Turmoil

Feb. 22 (Bloomberg) -- Japanese bond futures rose the most in a month as speculation that turmoil in Libya will escalate boosted demand for government debt.

Ten-year yields dropped to the lowest level in two weeks as Asian shares fell before a U.S. report that economists said will show home prices declined the most in a year, undermining confidence in a recovery in the world’s biggest economy. The cost to insure Japanese debt against default rose after Moody’s Investors Service cut its outlook for the nation’s sovereign-debt rating.

“Rising tension over the Libya situation is leading to falling stocks and rising bonds,” said Yasunari Ueno, chief market economist in Tokyo at Mizuho Securities Co., a unit of Japan’s second-largest bank. “Moody’s announcement helps remind overseas investors of the worsening of Japan’s finances over the medium to long term.”

Ten-year bond futures for March delivery gained 0.43 to 139.40 at the 3 p.m. close of the Tokyo Stock Exchange, the biggest gain since Jan. 20.

The yield on the benchmark 10-year bond fell three basis points to 1.275 percent as of 3:53 p.m. at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1.2 percent security due in December 2020 rose 0.259 yen to 99.345 yen. The yield was the lowest since Feb. 4.

The MSCI Asia Pacific Index of shares slid 1.9 percent. Libya erupted into violence yesterday when head of state Muammar Qaddafi’s son threatened “rivers of blood” and deployed security forces on protesters, some of whom claimed control of the second-biggest city, Benghazi.

Oil Rises

Oil futures for April delivery surged as much as 9.8 percent on concern crude supplies will be disrupted. Gold rose to as much as $1,410.75 an ounce, the highest since Jan. 4.

“The market interprets political unrest in the Middle East as a reason for a flight to quality, although there is a risk that a higher oil price will stoke concern about inflation,” said Shinji Nomura, chief debt strategist at Nikko Cordial Securities Inc. in Tokyo.

Moody’s lowered its outlook for Japan’s Aa2 credit rating to negative from stable, citing the risk the government won’t do enough to tackle the nation’s debt burden. Five-year credit-default swaps on Japan’s government bonds rose three basis points 3.5 basis points to 83 in Tokyo, Deutsche Bank AG prices showed. That’s the highest reading since Jan. 31.

“The bond market is aware of the status of Japan’s finances,” said Takafumi Yamawaki, chief rate strategist at JPMorgan Chase & Co. in Tokyo. “Should the rating be cut to single A, there would be investors to sell Japan’s bonds.”

Auction Demand

The gain in bonds was tempered as demand dropped at a 1.1 trillion-yen ($13.2 billion) sale of 20-year bonds today.

The auction drew bids for 2.64 times amount on offer, the lowest since November. The Finance Ministry set a 2 percent coupon on the debt, down from 2.1 percent at the Jan. 20 sale.

“A 2 percent coupon was lower than the market had expected and made investors hesitate to buy the new securities,” said Akitsugu Bandou, a senior economist in Tokyo at Okasan Securities Co. “Higher bond prices earlier today due to risk aversion also cut demand for the new issues.”

The yield on the previously issued 20-year bonds with a 2.1 percent coupon was unchanged at 2.045 percent.

Mizuho, Nikko Cordial, JPMorgan and Okasan are among the 24 primary dealers obliged to bid at the government’s debt sales.

To contact the reporters on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net; Yumi Ikeda in Tokyo at yikeda4@bloomberg.net.

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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