Japan’s Bonds Fall on Weaker Yen, Fed’s Discount Rate Increase

Feb. 20 (Bloomberg) -- Japan’s bonds fell, pushing up 10- year yields from a three-week low, as the yen’s decline to the lowest level in a month boosted the profit outlook for exporters and damped demand for government debt.

Japan’s long-term bonds also dropped after the Federal Reserve raised its discount rate for the first time in three years as it took another step toward withdrawing its stimulus measures. Bonds also fell on speculation primary dealers will cut debt holdings before Japan sells 20-year bonds next week.

“Selling pressure should mount on bonds as the yen weakens following the Fed’s action,” said Tetsuya Miura, chief market analyst in Tokyo at Mizuho Securities Co., a unit of Japan’s second-largest banking group.

The yield on the 2.1 percent bond due December 2029 rose 1.5 basis points to 2.165 percent this week at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price dropped 0.206 yen to 99.098 yen.

Ten-year bond futures for March delivery rose 0.10 over the week to 139.47 on the Tokyo Stock Exchange.

The yen fell to as low as 92.09 per dollar in Tokyo yesterday, the weakest since Jan. 12, after the Fed raised its discount rate by a quarter point to 0.75 percent. The central bank said the move will encourage financial institutions to rely more on money markets rather than the central bank.

‘Rather Difficult’

“It’s getting rather difficult for investors to keep buying mid-term bonds with the dollar in an uptrend,” Chotaro Morita, head of fixed-income strategy research at Barclays Capital, wrote yesterday in a note to clients.

The Finance Ministry will sell 1.1 trillion yen ($11.97 billion) of 20-year bonds on Feb. 23. Primary dealers, companies 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.

“Investors will try to secure a 2.2 percent coupon for next week’s 20-year auction,” said Akihiko Inoue, chief market analyst in Tokyo at Mizuho Investors Securities Co., a unit of Japan’s second-largest bank. “That should keep a lid on bonds.”

The decline in debt was tempered on speculation that deflation will boost the value of the fixed payments from government securities.

The Bank of Japan on Feb. 18 said deflation remained a “critical challenge,” as it left its benchmark interest rate on hold at 0.1 percent.

‘Firm Environment’

“Bonds are in a firm environment as investors focus on deepening deflation,” said Takafumi Yamawaki, a senior strategist in Tokyo at BNP Paribas Securities Japan Ltd., a unit of France’s largest bank. “Supply-demand conditions remain good for bonds.”

Japan’s gross domestic product deflator fell 3 percent in the fourth quarter from a year earlier, the Cabinet Office said Feb. 15. The deflator is used to calculate economic growth adjusted for price changes.

Five-year inflation bonds yield 1.01 percentage points more than similar-maturity regular notes, according to data compiled by Bloomberg. Inflation-adjusted securities typically yield less than regular bonds because their principal payment increases at the same rate as inflation.