Japan’s 20-Year Bonds Fall for 6th Week on Stock Gains, Supply

April 18 (Bloomberg) -- Japan’s 20-year bonds completed a sixth weekly decline as a rally in stocks and a government plan to increase debt sales damped demand for the securities.

Twenty-year bonds extended their losing streak to the longest since 2002 after officials said on April 16 the government would sell an extra 17 trillion yen ($171 billion) of debt to pay for Prime Minister Taro Aso’s third stimulus package. Longer-maturity bonds also weakened on speculation primary dealers would cut holdings before the Ministry of Finance sells 900 billion yen of 20-year debt on April 21.

“A rally in stock markets now poses a major downside risk for bonds,” said Yasuhide Yajima, senior economist at NLI Research Institute Ltd. in Tokyo. “If the Nikkei 225 Stock Average can sustain gains above 9,000, yields of 10-year debt may be pushed up to above 1.5 percent.”

The yield on the benchmark 20-year bond rose 1.5 basis points this week to 2.12 percent at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price of the 1.9 percent security due March 2029 fell 0.202 yen to 96.919 yen. A basis point is 0.01 percentage point.

The Nikkei 225 Stock Average gained 1.7 percent yesterday after Toshiba Corp. posted a smaller-than-expected operating loss. The index has risen 12 percent in the last month.

Institutional Buyers

Benchmark 10-year bonds rose for the first time in two days yesterday on speculation institutional investors will increase holdings of government securities for the fiscal year that started April 1.

“Japanese investors are still willing to focus on bonds in times of an economic downturn, and they are likely to purchase debt once yields on 10-year securities come closer to 1.5 percent,” said Tatsuo Ichikawa, a senior strategist at RBS Securities Japan Ltd. in Tokyo. “But as you can see from today’s move, they will not buy in a hurry.”

Ten-year bond futures for June delivery climbed 0.08 yesterday to 136.81 on the Tokyo Stock Exchange yesterday. Ten- year yields declined half a basis point to 1.445 percent.

Meiji Yasuda Life Insurance Co., Japan’s third-largest life insurer, said on April 13 it will boost its domestic bond holdings by 460 billion yen this fiscal year as it reduces its stock investments. Dai-ichi Mutual Life Insurance Co., the third largest, said the following day it will “slightly increase” holdings of yen-denominated bonds this financial year.

Debt Sales

Japan may sell as much as 17 trillion yen of bonds this fiscal year on top of the planned 113.3 trillion yen debt sales already planned, according to two Japanese officials who declined to be identified. The extra sales will include borrowing for Aso’s stimulus package as well as about 6 trillion yen of bonds to fund loans for state-owned financial institutions, they said.

The Ministry of Finance said in December it planned to boost bond sales by 7 trillion yen to 113.3 trillion yen in the financial year that ends on March 31, 2010.

“Including an expected shortfall of tax revenue due to tumbling corporate profits in Japan, additional bond issuance may reach 20 trillion yen this year,” said Hirokata Kusaba, an economist in Tokyo at Mizuho Research Institute Ltd., a unit of Japan’s second-largest banking group. “The anxiety about rising debt sales will continue to weigh on bonds.”

Corporate Credit

Demand for bonds also fell this week on speculation the corporate credit market is improving, said Takeo Okuhara, a fixed-income strategist at Daiwa SB Investments Ltd.

“There are signs that the credit crunch is easing, making it easier for companies to raise funds on their own,” Tokyo- based Okuhara said. “This will bode ill for government debt.”

JPMorgan Chase & Co. on April 16 raised $3 billion in its first dollar-denominated debt sale without the backing of the U.S. government since August.

The Markit iTraxx Japan index of credit-default swaps fell 12.5 basis points to 292.5 basis points yesterday, according to prices from Barclays Capital.

Credit-default swap indexes are benchmarks for protecting bonds against default and traders use them to speculate on credit quality. An increase suggests deteriorating investor perceptions of credit quality and a drop shows improvement.

Yield Curve

Two-year notes rose yesterday as the Tokyo three-month interbank offered rate, or Tibor, a measure of the cost of lending between banks, fell for a 27th day, steepening the so- called yield curve. The difference in yield between two-year notes and 20-year bonds widened to 172.5 basis points yesterday from 153.5 at the end of March.

“The widespread perception that the Bank of Japan will maintain low interest rates will continue to support shorter- dated notes,” Makoto Yamashita, chief Japan interest-rate strategist in Tokyo at Deutsche Securities Inc. “Declines in short-term rates may send yields of 10-year debt back toward 1.3 percent” in the next two weeks, he said.

Investors who bought 10-year bonds yesterday would make a return of 2.2 percent by the end of September should benchmark yields drop to 1.22 percent, the weighted forecast of economists and analysts surveyed by Bloomberg News.