Japanese Bonds Complete Third Weekly Advance as Stocks Decline

July 4 (Bloomberg) -- Japanese bonds rose for a third week as Asian stocks extended a slide in global shares after the world’s biggest economy lost more jobs last month than economists forecast, spurring demand for government debt.

Benchmark 10-year yields dropped to the lowest level since March as reports this week also showed unemployment in the U.S. and Europe increased, fueling speculation the global slump will be prolonged. Bonds posted the longest stretch of weekly gains in two months on speculation the Bank of Japan will keep interest rates near zero to help counter the deepest recession in half a century.

“The U.S. jobs report meant that we shouldn’t be complacent about the prospects of the global economy,” said Akio Yoshino, chief economist in Tokyo at Societe Generale Asset Management (Japan) Co., a unit of France’s third-largest bank. “Stock prices, which were overvalued, now need to undergo a correction, and bonds may see some support in this process.”

The yield on the 10-year bond sold on July 2 fell 7.5 basis points this week to 1.32 percent, the lowest for a benchmark since March 30, in Tokyo, according to Japan Bond Trading Co.

Ten-year bond futures for September delivery rose 0.78 to 138.44 yen at the Tokyo Stock Exchange.

The Nikkei 225 Stock Average declined 0.6 percent yesterday, a third day of losses.

Job Cuts

U.S. employers cut 467,000 jobs last month, after trimming a revised 322,000 positions in May, the U.S. Labor Department said on July 2. Payrolls were forecast to drop by 365,000, according to a Bloomberg News survey of economists. The unemployment rate increased to 9.5 percent, the highest since August 1983.

“The U.S. jobs report suggested the recovery momentum will remain weak,” said Yasunari Ueno, chief market economist in Tokyo at Mizuho Securities Co., a unit of Japan’s second-largest publicly traded lender by assets. “Japan’s 10-year bond yield will decline toward 1 percent.”

Shorter-maturity notes also advanced as signs the global recovery is stalling fueled speculation the Bank of Japan will keep its benchmark rate at 0.1 percent to spur growth.

“As the view is now rife that the policy rate will be left unchanged for the next year or so, bills and shorter-dated notes are likely to continue to draw decent demand,” said Katsutoshi Inadome, a fixed-income strategist in Tokyo at Mitsubishi UFJ Securities Co., a unit of Japan’s largest lender.

The yield on the two-year note has declined 6.5 basis points this week to 0.255 percent.

Debt Sales

Gains in bonds were limited by speculation primary dealers will cut holdings before the Ministry of Finance sells 300 billion yen ($3.12 billion) in 40-year debt on July 7.

“As the budget deficit is swelling, investors will eventually start demanding a higher premium to hold government debt,” said Kazuto Uchida, chief economist in Tokyo at Bank of Tokyo Mitsubishi UFJ Ltd., a unit of Japan’s largest lender by market value.

Japan’s total revenue in the year ended March 31 was 718 billion yen less than its expenditure, the first shortfall in seven years, the Finance Ministry said in Tokyo on July 1.

Japan’s public debt, the world’s largest, will balloon to 197 percent of gross domestic product in 2010, according to the Organization for Economic Cooperation and Development.

Primary dealers, which are required to bid at government debt sales, often reduce holdings of bonds before an auction in case prices decline before they can pass on the new securities to investors.

Ten-year bonds completed their second consecutive quarter of losses in the three months ended in June, the longest slide since the six months ended June 2006 as the Ministry of Finance boosted the size of its auctions as part of a plan to increase total debt sales by 15 percent this fiscal year.