Japan’s Bonds Complete Second Monthly Loss on Supply Concerns

Feb. 28 (Bloomberg) -- Japan’s 30-year bonds completed a two-month drop, the longest slump since May, as evidence mounted the economy faces its worst postwar recession, spurring concern the government will sell more debt to fund stimulus plans.

Bonds fell after reports yesterday showed manufacturers cut production by an unprecedented 10 percent and consumers slashed spending. The finance ministry in December said it will increase debt sales to 113.3 trillion yen ($1.15 trillion) in the year starting April 1, from 106.3 trillion yen this financial year.

“The acceleration of the decline in industrial output may spark speculation that the government will step up economic pump-priming measures,” said Masaru Hamasaki, senior strategist in Tokyo at Toyota Asset Management Co., which oversees about $3.3 billion. “This expectation may push up yields.”

The yield on thirty-year bonds rose 2.5 basis points to 1.955 percent this month, according to Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price of the 2.4 percent security due September 2038 fell 0.524 yen to 108.334. The yield on 20-year bonds added half a basis point to 1.90 percent this month. A basis point is 0.01 percentage point.

The month-on-month decline in factory output exceeded December’s record slump of 9.8 percent, the Trade Ministry said yesterday in Tokyo. Household spending fell 5.9 percent from a year earlier, the biggest drop in more than two years, a separate report showed yesterday.

Treasuries Slump

“Given the rapidly deteriorating economy in Japan, the government may need to compile additional stimulus packages worth about 20 trillion to 30 trillion yen, bringing an accumulated pump-priming measure up to 100 trillion yen,” said Tatsushi Shikano, senior economist at Mitsubishi UFJ Securities Co., an unit of Japan’s biggest banking group. “The additional policy response will further boost bond issuance.”

The yield on Japan’s benchmark 10-year bond rose half a basis point to 1.27 percent yesterday. Ten-year bond futures for March delivery declined 0.14 to 139.50 yesterday in Tokyo.

Ten-year Treasury yields reached 3.02 percent on Feb. 26, the most since Feb. 9 on concerns the U.S. government will add to record debt sales as it seeks to spend its way out of a recession. Yields slid to a record low of 2.04 percent on Dec. 18 and averaged 4.65 percent in the past decade.

“The U.S. government is selling more bonds than it can buy back, resulting in rises in yields there,” said Takeo Okuhara, a Tokyo-based fixed income strategist at Daiwa SB Investments Ltd. “Until global concerns about rising debt sales subside, this will continue to be a drag on the debt market.”

Month-End Buying

President Barack Obama’s administration forecast a budget deficit of $1.75 trillion in the fiscal year ending Sept. 30. That’s 23 percent higher than an estimate by economists at primary dealer Goldman Sachs Group Inc., and equivalent to about 12 percent of the U.S.’s gross domestic product.

Japan’s bond losses were limited on speculation investors will buy longer-term government debt to match an index that they use to gauge performance.

Nomura Securities Co. increased the average duration of its Bond Performance Index by 0.17 year to 6.41 years for March, according to the company’s Web site.

“Typical month-end buying by index players, aimed at prolonging duration, supports the market,” said Makoto Yamashita, chief Japan interest rate strategist in Tokyo at Deutsche Securities Inc. “We continue to believe that any rise in the yield will be limited to 1.4 percent.”

Money managers such as Japan’s Government Pension Investment Fund, which runs the world’s largest pool of retirement wealth, use Nomura’s index to help decide their holdings. Duration is a gauge of how much a change in yield affects a bond’s price.

Inflation Bonds

Consumer prices failed to rise in January for the first time in more than a year as households cut spending, the government said yesterday, indicating deflation may resurface.

Ten-year inflation-indexed debt is yielding 2.7 percentage points more than similar-maturity conventional bonds, signaling investors expect consumer prices to decline over the next decade. The securities typically yield less than regular bonds because their principal payment increases at the same rate as inflation.

“If you look solely at the poor state of the Japanese economy, which is already in deflation, I would not be surprised if the 10-year yield fell below 1 percent,” said Takeshi Minami, chief economist at Norichukin Research Institute Ltd. in Tokyo.

Gross domestic product fell at an annual rate of 12.7 percent in the three months to December, the fastest since the 1974 oil shock last quarter as exports collapsed. Bank of Japan Governor Masaaki Shirakawa last week said GDP figures will remain “severe” in the first two quarters of this year.