Japan’s Bonds Complete Third Weekly Loss as Recovery Signs Grow

March 20 (Bloomberg) -- Japan’s bonds fell for a third week as signs the world’s second-largest economy is recovering damped demand for the safety of government debt.

Benchmarkyields climbed to the highest level since the start of February before a government report next week that economists said will show exports surged more than 40 percent last month from a year earlier. Bonds also dropped this week as sentiment among Japanese manufacturers climbed and demand for services increased, signs the rebound is gathering momentum.

“Economic prospects are turning out be much brighter than expected,” said Shinji Nomura, chief debt strategist in Tokyo at Nikko Cordial Securities Inc., part of Japan’s third-largest banking group. “Upward pressure on bond yields will increase.”

The yield on the 10-year bond rose two basis points this week to 1.36 percent at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1.4 percent security due March 2020 fell 0.177 yen to 100.351 yen. The yield climbed as high as 1.37 percent yesterday, matching the most since Feb. 5.

Ten-year bond futures for June delivery slid 0.22 this week to 138.63 on the Tokyo Stock Exchange.

Japan’s exports jumped 45.7 percent in February, after rising 40.8 percent the previous month, according to a Bloomberg News survey before the March 24 report. Sentiment among large manufacturers was positive for a third quarter, a government survey showed March 18. Demand for services rose 2.9 percent in January, the Trade Ministry said March 17.

The Nikkei 225 Stock Average advanced 0.8 percent yesterday to 10,824.72, completing a sixth week of gains.

‘Encourage Investors’

“A recovery in risk appetite will encourage investors to buy more higher-yielding assets such as commodity currencies and stocks,” said Kazumasa Yamaoka, a senior analyst in Tokyo at GCI Capital Co., which advises on foreign currency, overseas investments and hedge funds.

Ten-year yields may advance to 1.75 percent and the Nikkei 225 may rise above 12,000, said Tatsushi Shikano, senior economist in Tokyo at Mitsubishi UFJ Securities Co., a unit of Japan’s largest banking group.

“A robust recovery in overseas demand will shore up corporate profits and help improve corporate confidence notably at the Bank of Japan’s next Tankan survey,” Shikano said. “As the continued economic recovery forms the basis for sustained rise in stocks.”

The Tankan index of sentiment among large manufacturers, due to be released April 1, climbed to minus 10 in the first quarter, from minus 24 in December, Shikano predicted.

Yields Attract

This week’s drop in bonds was tempered on speculation yields at a six-week high will lure institutional investors amid signs some parts of the economy are still struggling to recover.

“Ten-year yields above 1.40 percent look attractive given stubborn deflationary pressure,” said Shinji Hiramatsu, who helps oversee the equivalent of $15.7 billion in assets at Sompo Japan Asset Management Ltd. in Tokyo.

Japanese commercial land prices fell to the lowest in at least 36 years, the Ministry of Land, Infrastructure, Transport and Tourism said on March 18. Prices declined 6.1 percent in 2009, more than the 4.7 percent drop a year earlier.

Japanese bonds handed investors a loss of 0.1 percent so far this month in local-currency terms, according to indexes from Bank of America Corp.’s Merrill Lynch unit.