Japanese Bonds Rise, Yields Fall to 4-Week Low, on Deflation

May 2 (Bloomberg) -- Japan’s 10-year bonds advanced, pushing yields to a four-week low yesterday, after a government report signaled Japan may return to deflation, easing concern higher prices will erode the value of debt.

Ten-year securities yesterday completed a third weekly gain, outperforming U.S. Treasuries and U.K. gilts, after a separate report showed the nation’s unemployment rate surged to the highest level since August 2004. Demand for debt also increased on concern swine flu will spread, hurting economies globally. Japan’s financial markets will be closed between May 4 and May 6 for the so-called Golden Week holidays.

“Concerns of deflation are positive for the bond market, especially as we can expect a prolonged period of monetary easing,” said Takashi Nishimura, a Tokyo-based analyst at Mitsubishi UFJ Securities Co., a unit of Japan’s largest bank by assets. “It’s going to take time for economic recovery. Swine flu is still a concern because we haven’t got a clue about its economic implications.”

The yield on the 1.3 percent bond due March 2019 fell 2.5 basis points this week to 1.395 percent, the lowest since April 3, in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price added 0.217 yen to 99.176 yen. A basis point is 0.01 percentage point.

Ten-year bond futures for June delivery gained 0.32 this week to 137.47 at the Tokyo Stock Exchange.

Japan’s bonds handed investors a return of 0.4 percent in the past three weeks through April 30, compared with a loss of 1.2 percent for holders of Treasuries, according to indexes compiled by Merrill Lynch & Co. U.K. gilts lost 0.4 percent, the indexes show.

Jobless Rate

A government report yesterday showed Japan’s jobless rate climbed to 4.8 percent in February, higher than the 4.6 percent expected by economists.

“It’s not the time to sell bonds,” said Eiji Dohke, chief strategist in Tokyo at UBS Securities Japan Ltd., one of the 24 primary dealers required to bid at government debt sales.

Consumer prices excluding fresh food fell 0.1 percent in March from a year earlier, the first decline since September 2007, the statistics bureau said yesterday in Tokyo. Economists expected a 0.2 percent decline.

“The consumer price index turned negative,” which may support investors’ sentiment, said Akihiko Inoue, chief market analyst in Tokyo at Mizuho Investors Securities Co., a unit of Japan’s second-largest bank. “Purchasing bond futures may be preferred before the long holiday.”

Breakeven Rate

Ten-year inflation-linked bonds yesterday yielded 1.86 percent more than similar-dated conventional debt, signaling investors expect the world’s second-largest economy to reenter deflation. The securities typically yield less than regular bonds because their principal payment increases at the same rate as inflation.

Japan will experience a general drop in prices through the first quarter of next year, according to a Bloomberg survey of economists.

Demand for bonds was limited after the Nikkei 225 Stock Average advanced 1.7 percent, extending gains into a third month. Chrysler LLC, the automaker that survived a near-death experience in 1979, on April 30 began a bankruptcy process designed to revive its business using small-car technology from Fiat SpA, its new partner.

“Chrysler and Fiat have formed a partnership that has a strong chance of success,” U.S. President Barack Obama said on April 30. “It’s a partnership that will save more than 30,000 jobs at Chrysler and tens of thousands of jobs at suppliers, dealers, and other businesses that rely on this company.”

‘More Optimistic’

“The market is more optimistic about Chrysler’s bankruptcy and looking toward the re-engineering of the company,” said Satoru Ogasawara, a foreign-exchange analyst and economist in Tokyo at Credit Suisse Group AG, the second-largest Swiss bank. The feeling is that “the bad news is over now.”

Demand for bonds increased as swine flu reached 11 countries, heightening concerns of a global pandemic. More than 250 people have swine flu confirmed by genetic tests, according to the World Health Organization’s Web site.

Hundreds more cases are suspected in New York, Mexico and Australia. The health agency said thousands of samples from sick patients are backlogged for testing, and disease trackers are looking at whether an outbreak in Spain should trigger a declaration of a pandemic.