Japan Bonds Slide 3rd Day as Stock Gains, U.S. Rates Trim Demand

Japanese government bonds fell, pushing five-year rates to an almost two-year high, as an advance in shares and U.S. bond yields sapped demand for debt with yields still among the lowest in the world.

Ten-year yields extended the biggest two-day surge in nearly a decade, while futures on the securities sank to a one-year low. Volatility in JGBs has soared since the Bank of Japan said on April 4 it would double bond purchases in an effort to end deflation. Benchmark U.S. Treasury yields reached a seven-week high yesterday while Japan’s Topix Index of shares held near the most in 4 1/2 years. The Ministry of Finance sold 30-year debt today and will auction 5-year notes this week.

“Unless there’s a clear pause to stock gains, investors are reluctant to buy JGBs,” said Takafumi Yamawaki, the Tokyo-based chief rates strategist at JPMorgan Chase & Co., one of the 24 primary dealers obliged to bid at government debt auctions. “We’ll have a five-year note auction amid weak demand, so there’s uncertainty around it.”

Five-year yields surged seven basis points, or 0.07 percentage point, to 0.39 percent as of 2:51 p.m. in Tokyo after earlier touching 0.4 percent, the most since July 2011.

The benchmark 10-year note rose as much as 6 1/2 basis points to 0.855 percent, the highest since August. The yield jumped 20 basis points in the previous two sessions, the sharpest two-day gain since October 2003.

Japanese debt has lost 2.7 percent since the BOJ announced an expansion of monetary stimulus last month, according to a Bank of America Merrill Lynch index. In dollar terms, JGBs have slumped 7.8 percent, reflecting the yen depreciation.

JGB Auctions

The Topix slipped 0.1 percent today after yesterday surging 1.8 percent to 1,232.20, a level not seen since August 2008. U.S. yields reached 1.94 percent yesterday, the highest since March 26.

The Ministry of Finance offered to sell 500 billion yen ($4.9 billion) in 30-year, 1.8 percent bonds today. The sale saw bids for 3.57 times the amount on offer, compared with a so-called bid-to-cover ratio of 3.64 at the previous sale. The Ministry will offer five-year debt on May 16.

Japan has the largest debt load in the world, making its fiscal health vulnerable to rising interest rates. The nation’s liabilities will probably balloon to 245 percent of economic output this year, according to the International Monetary Fund’s estimate. The debt totaled 991.6 trillion yen at the end of March, a 0.6 percent decrease from the end of December, according to a Ministry of Finance statement on May 10.

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