Japanese Bonds Complete First Weekly Decline in Month on Supply

May 9 (Bloomberg) -- Japan’s bonds fell, completing the first weekly drop in a month, on speculation investors will pare holdings of yen-denominated notes after rising U.S. debt sales triggered a slide in 30-year Treasuries.

Benchmark yields climbed from near the lowest level in a month before the Ministry of Finance sells 1.9 trillion yen ($19.2 billion) in 10-year bonds on May 12. Primary dealers, which are required to bid at government debt sales, often reduce holdings of bonds in case prices decline before they can pass on new securities to investors.

“Investors are becoming anxious about fair value levels of government bonds as steep declines of U.S. Treasuries revived worries about supply and demand,” said Katsutoshi Inadome, a Tokyo-based strategist at Mitsubishi UFJ Securities Co., a unit of Japan’s biggest bank. “It is hard to say if investors will buy new debt aggressively at next week’s auction.”

The yield on the benchmark 10-year bond rose 5.5 basis points this week to 1.450 percent at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price of the securities dropped 0.47 to 98.706. Japanese financial markets were closed between May 4 and 6 due to local public holidays.

Ten-year bond futures for June delivery declined 0.71 this week to 136.76 at the Tokyo Stock Exchange.

Debt Sales

Ten-year yields reached a five-month high of 1.49 percent on April 10, the day Japanese Prime Minister Taro Aso unveiled a record 15.4 trillion yen stimulus package. Finance Minister Kaoru Yosano on April 21 said the government would issue 10.8 trillion yen of additional new bonds this fiscal year.

The new issuance comes on top of the December plan to boost bond sales by 7 trillion yen to 113.3 trillion yen in the financial year that began April 1.

Japan’s government debt is already 170 percent of gross domestic product, the most among Group of Seven nations, data compiled by Bloomberg show.

“Worries about slackening supply and demand conditions are likely to weigh on the market,” said Masaru Hamasaki, senior strategist in Tokyo at Toyota Asset Management Co., which oversees about $3.3 billion. “The recent raft of economic data is also beginning to signal that the global economy may achieve a stronger-than-expected rebound.”

Ten-year yields may reach 1.6 percent, Hamasaki said.

Japan’s economy is no longer in freefall and will rebound as global demand picks up, according to a member of the government committee that charts the economic cycle.

BOJ’s Stance

“The worst is over,” Takao Komine, 62, an economist and professor at Hosei University in Tokyo, said in an interview on May 7. “We’ll probably see the beginning of recovery at the end of this year.” Komine is one of 10 economists on a government panel that marks Japan’s recession and recovery cycles.

Losses were limited by speculation that the Bank of Japan would maintain key interest rates at 0.1 percent and continue to flood the short-term money market with excessive liquidity, according to Takeshi Minami, chief economist in Tokyo at Norinchukin Research Institute Ltd.

“The BOJ has no other choice but to maintain the current credit easing throughout 2010,” Minami said. “The wide-spread expectation for the sustained credit easing should allow yields of shorter-dated notes to move stably at low levels and this will then prevent spikes of longer-dated yields.”

The Bank of Japan decided on April 30 to maintain its policy rate and short-term money market operation guidelines by a unanimous vote.

Yield Curve

Demand for bonds also declined on concerns that yield curves across the globe will steepen, according to Kazuhiko Sano, chief strategist in Tokyo at Nikko Citigroup Ltd., a unit of the second-largest bank in the U.S. The yield curve, or the spread between returns on short- and long-term debt, typically steepens when traders anticipate a recovery.

The difference in yields between Japan’s five- and 20-year debt stood at 1.20 percentage points yesterday, down from this year’s high of 1.29 points on April 21.

The U.S. 30-year bond yield climbed 23 basis points, or 0.23 percentage point, the most since Jan. 5, to 4.316 percent on May 7, according to BGCantor Market data. It was the highest yield since Nov. 14. As long-term yields have risen, the difference between yields on 30-year bonds and two-year notes increased to 3.30 percentage points on May 7, the widest since January 2004.