Japanese 10-Year Bonds Decline as Aso Orders Further Spending

March 14 (Bloomberg) -- Japan’s 10-year bonds completed a second week of losses after Prime Minister Taro Aso ordered a third spending plan, fanning concern debt supply will increase.

Ten-year yields reached the highest in a month after the Mainichi newspaper said yesterday that the next plan may total 20 trillion yen ($204.7 billion). Aso has already announced 10 trillion yen of spending since taking office. Government securities also slumped after Bank of America Corp., the biggest U.S. lender, said it was profitable and won’t need more federal aid, lifting up share prices in the U.S., Europe and Asia.

“Bond supply will be the key factor as the weaker the economy, the stronger and larger the stimulus package has to be,” said Yuuki Sakurai, general manager of financial and investment planning in Tokyo at Fukoku Mutual Life, which manages the equivalent of $54 billion in assets. A large economic stimulus plan may be financed through “an increase in bond issuance, so it’s very negative for the market.”

The yield on the 1.3 percent bond due March 2019 rose 2.5 basis points this week to 1.315 percent in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price fell 0.221 yen this week to 99.867 yen. The yield climbed half a basis point yesterday after touching 1.32 percent, the highest since Feb. 10.

Twenty-year yields increased two basis points this week to 1.9 percent. Ten-year bond futures for June delivery lost 0.17 this week to 138.67 at the Tokyo Stock Exchange. A basis point is 0.01 percentage point.

Fiscal Stimulus

“We cannot avoid the fact that there is a risk of further economic downturn,” Aso said at a news conference in Tokyo yesterday. “We must act before the risk becomes reality.”

Finance Minister Kaoru Yosano said the government will also inject 121 billion yen into three regional banks. The world’s second-largest economy shrank an annualized 12.1 percent in the three months ended Dec. 31, the sharpest contraction since 1974, the Cabinet Office said on March 12.

The government “appears to be increasingly determined to implement ample economic stimulus measures,” said Chotaro Morita, head of fixed-income strategy research at Barclays Capital in Tokyo. “If so, it will likely have to finance those measures with straightforward JGB issuance,” which is “bound to make the bond market a bit jittery.”

Japan’s Ministry of Finance plans to boost bond supply by 7 trillion yen to 113.3 trillion yen in the financial year beginning April 1.

Profitable Year

“We have been profitable for the first two months of the year,” Bank of America Chief Executive Officer Kenneth Lewis said on March 12. “We expect to be profitable” in 2009. The bank may earn $50 billion this year, measured before taxes and provisions, Lewis said.

The Nikkei 225 Stock Average yesterday completed the best week since Nov. 28, gaining 5.5 percent. Benchmark 10-year yields had a correlation of 0.74 with the Nikkei this month, according to Bloomberg data. A value of 1 would mean the two moved in lockstep.

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