Japan Bonds Fall a 2nd Day as Stocks Rise Before U.S. Payrolls

Japanese bonds fell for a second day before a U.S. report that economists said will show job gains increased last month, damping demand for the safety of debt.

Ten-year debt posted its biggest weekly drop in a month as Japanese stocks extended a rally in shares around the world on optimism the global recovery is gaining momentum. Ten-year futures dropped for the fifth time in six days after a separate U.S. report yesterday showed initial jobless claims unexpectedly declined last week.

“With the U.S. economy not in a bad shape, the downside risk to Japan’s economy is reduced,” said Ayako Sera, a strategist in Tokyo at Sumitomo Trust & Banking Co., which manages about $331 billion in investments. “The chance that Japanese bond yields will fall has decreased.”

The yield on the benchmark 10-year bond rose one basis point to 1.295 percent as of 3:36 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1.3 percent security due March 2021 lost 0.088 yen to 100.044 yen. The yield climbed 5.5 basis points this week, the most since the period ended Feb. 4.

Ten-year bond futures for March delivery slipped 0.19 to 139.35 at the 3 p.m. close of the Tokyo Stock Exchange. The contracts have fallen 0.24 this week.

The Nikkei 225 Stock Average gained for a second day, adding 1 percent, after the Standard & Poor’s 500 Index climbed 1.7 percent in New York yesterday.

U.S. employers hired 196,000 workers last month, the most since May, according to a Bloomberg News survey of economists before today’s report. The Labor Department said yesterday that applications for unemployment benefits dropped by 20,000 to 368,000 last week.

‘Unfavorable’ for Bonds

“The environment is unfavorable for Japanese bonds,” Kazuhiko Sano, chief strategist at Tokai Tokyo Securities Co., wrote in a note to clients today. “The bond market will continue to fall.”

Japan’s government bonds have handed investors a loss of 0.9 percent this year, according to an index compiled by Merrill Lynch & Co. This compares with a 2.4 percent gain in 2010.

Ten-year yields may climb to 1.6 percent and investors should reduce the duration of their portfolios, according to Royal Bank of Scotland Plc. Duration is a gauge of how much a change in yield affects a bond’s price.

“The risk of the market collapsing to this level, even if temporarily, is steadily rising,” Akito Fukunaga, chief rates strategist at the brokerage unit of RBS in Tokyo, wrote in a note today to clients. “Investors should not buy on dips when the 10-year rate reaches 1.35 percent, the top end of the range up until now,” he wrote.

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