Japan’s Bonds Fall a 3rd Week on Optimism Global Crisis Easing

April 11 (Bloomberg) -- Japanese bonds fell for a third week, matching the longest losing streak since June, as stocks rallied worldwide on optimism the worst of the financial turmoil may be over.

Benchmark 10-year yields touched the highest level in almost five months yesterday as the government unveiled an additional stimulus package totaling 15 trillion yen ($150 billion), fueling concern debt sales will increase. Longer- maturity bonds fell more than short-dated ones this week, steepening the so-called yield curve.

“Expectations that the U.S. and Japanese economies may be bottoming out are now growing, spurring euphoria about prospects for stock markets,” said Takeshi Minami, chief economist in Tokyo at Norinchukin Research Institute Ltd. “Benchmark yields may test 1.5 percent.”

The yield on the 10-year bond rose three basis points, or 0.03 percentage point, this week to 1.45 percent, at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price of the 1.3 percent security due in March 2019 slid 0.256 yen to 98.698 yen. The yield touched 1.49 percent yesterday, the highest level since Nov. 18.

Ten-year bond futures for June delivery fell 0.73 this week to 136.68 on the Tokyo Stock Exchange. The difference between five- and 20-year yields, a measure of the yield curve, widened to 1.24 percentage points, matching the most since Dec. 12.

Stocks Gain

Bonds declined as the Nikkei 225 Stock Average gained for a fifth week, the longest winning stretch since May 2008. Local equities followed U.S. shares higher after White House chief economic adviser Lawrence Summers said on April 9 the “free- fall” in the U.S. economy will end soon.

The VIX index of volatility fell to its lowest closing level since September, dropping 6 percent to 36.53 on April 9. The VIX had only surpassed 40 in four periods of its 19-year history before Lehman Brothers Holdings Inc. filed for bankruptcy in September.

“Rising stock prices improve the risk appetite and make investors feel like buying more riskier assets and less bonds,” said Yasuhide Yajima, an economist in Tokyo at NLI Research Institute Ltd. If the Nikkei 225 approaches 10,000, the 10-year bond yield may rise to 1.6 to 1.7 percent, he said.

Daily Gain

Bonds rose yesterday, ending two days of losses, on speculation yields approaching the highest level in five months attracted investors.

“The 1.5 percent mark may continue to serve as an important support line for 10-year bonds,” said Masashi Shimominami, a Tokyo-based market analyst at Mizuho Securities Co., a unit of Japan’s second-largest bank.

The 10-year yield will fall to 1.22 percent by the end of September, according to the weighted forecast of economists and analysts surveyed by Bloomberg News. Should that estimate prove accurate, investors who bought 10-year debt yesterday will make a return of 2.3 percent by Sept. 30.

“Ten-year bonds are now looking attractive,” said Toshiro Yanagiya, general manager of the securities business division at Aozora Bank Ltd. in Tokyo. “The ongoing announcement of quarterly profits in the U.S. may reveal that things are not developing in such a positive way as the market would prefer.”

Profits at S&P 500 companies fell 38 percent on average in the first quarter, according to analysts’ estimates compiled by Bloomberg. The stretch of seven straight quarterly earnings declines is the longest since at least the Great Depression, data compiled by Standard & Poor’s and Bloomberg show.

Debt Supply

Bonds also fell this week on speculation the supply of debt will keep increasing as the government spends more to help the economy emerge from recession.

The government will issue as much as 11 trillion yen of additional debt to pay for Prime Minister Taro Aso’s extra stimulus plans, Chief Cabinet Secretary Takeo Kawamura said on April 9. The Ministry of Finance said in December it plans to boost bond sales by 7 trillion yen to 113.3 trillion yen in the financial year that began on April 1.

Including financial measures and guarantees, the government’s latest stimulus plan will total 57 trillion yen, Aso said at a press conference in Tokyo yesterday. His third package since taking office in September would take total spending to 25 trillion yen.

“Additional bond issuance stemming from the compilation of new pump-priming measures exceeds my expectations,” said Makoto Yamashita, chief Japan interest-rate strategist at Deutsche Securities Inc. in Tokyo.

Deutsche Bank raised its 10-year yield forecast for the next three months to a range from 1.2 to 1.6 percent, from an earlier prediction of between 1 percent and 1.5 percent, Yamashita said.