Japan’s 10-Year Bond Yields Are Near 2011 Low on Europe Concern

Japan’s 10-year bond yields were two basis points from this year’s low as concern that Europe’s sovereign-debt crisis will deepen boosted demand for the relative safety of government debt.

Bond futures held onto last week’s gain as the defeat of Spain’s ruling party in local elections raised speculation that opposition will grow to austerity measures enacted to reduce nation’s deficit. Twenty-year debt slumped, snapping a two-day gain, on concern demand will fall at a 1.1 trillion-yen ($13 billion) auction of the securities on May 26.

“There is still room for yields on medium-term bonds to fall,” said Akitsugu Bandou, a senior economist in Tokyo at Okasan Securities Co., one of the 24 primary dealers obliged to bid at government debt sales. “Europe’s debt problems will continue to emerge.”

The benchmark 10-year yield was unchanged at 1.125 percent as of 3:48 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1.1 percent security due March 2021 traded at 99.778 yen. The yield touched 1.105 percent on May 16, the lowest since Nov. 24. A basis point is 0.01 percentage point.

Ten-year bond futures for June delivery dipped 0.03 to 140.79 at the 3 p.m. close of the Tokyo Stock Exchange after advancing 0.25 on May 20. The Nikkei 225 Stock Average slid 1.5 percent.

Spain’s opposition People’s Party won 38 percent of the vote in municipal elections yesterday, compared with 28 percent for the ruling Socialist party, with 99 percent of ballots counted, the Interior Ministry said. The country is struggling to curb the euro region’s third-largest budget deficit and avoid following Greece, Portugal and Ireland in accepting a bailout.

Auction Ahead

Ten-year Treasury yields retreated three basis points to 3.11 percent today. Greece’s credit rating was cut three levels by Fitch on May 20, while Italy had its credit outlook changed to negative by Standard & Poor’s Ratings Services.

Yields on Japan’s 20-year debt rose two basis points to 1.935 percent. The prior sale of the securities on April 21 drew bids valued at 2.92 times the amount on offer, compared with the average of 3.65 for the past 10 auctions.

“There is a sense of caution in the market about high bond prices,” said Okasan’s Bandou. “The point is whether the auction of 20-year debt will pass smoothly with the current yields.”

Primary dealers often reduce holdings of bonds in case prices decline before they can pass on the new securities to investors.

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