Japan’s Bonds Post Weekly Loss on Recovery Signs, Stock Gains

May 29 (Bloomberg) -- Japanese bonds completed a weekly loss as signs the global economy is recovering and a rally in stocks around the world damped demand for government debt.

Ten-year yields were near the highest level in a week as optimism the European debt crisis is easing boosted local shares for a third day and pushed down the cost of protecting Japanese bonds from default. Bond losses were tempered yesterday after a government report showed deflation deepened, enhancing the value of the fixed payments from debt.

“We continue to have hard evidence pointing to a sustained recovery” of the global economy, said Masahide Tanaka, a senior strategist in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s second-largest banking group. “Current yield levels are apparently unsustainable.”

The yield on the benchmark 10-year bond climbed 1.5 basis points this week to 1.25 percent at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price fell 0.133 yen to 100.436 yen. The yield briefly climbed to 1.27 percent yesterday, the highest level since May 20.

Ten-year bond futures for June delivery rose 0.05 this week to 140.45 on the Tokyo Stock Exchange.

The Nikkei 225 Stock Average advanced 1.3 percent yesterday and the Markit iTraxx Japan index of credit-default swaps dropped 11 basis points to 129 basis points. The swap indexes are benchmarks for protecting bonds against default. An increase suggests deteriorating perceptions of credit quality and a drop shows improvement.

Factory Output

Japanese factoryoutput gained 2.5 percent in April, following a 1.2 percent increase in March, according to the median estimate of economists surveyed by Bloomberg News before the data is announced on May 31.

Demand for bonds also waned after China confirmed its commitment to investing in Europe, denying earlier media reports it may be reconsidering putting money into the region due to the sovereign debt crisis.

China’s State Administration of Foreign Exchange, or SAFE, which manages $2.4 trillion of foreign-exchange reserves, said in a statement on May 27 that “Europe has been and will be one of the major markets for investing China’s exchange reserves.”

“Once the extreme pessimism about the credit crisis in Europe eases, the flight to safer assets like bonds will reverse,” said Yozo Asai, head of the investment information department at Naito Securities Co. “Stocks were oversold from a viewpoint of macro- and micro-economic fundamentals.”

Jobless Rate

Ten-year bonds erased earlier losses to be unchanged yesterday after government reports showed Japan’s unemployment rate unexpectedly increased in April, household spending fell and deflation deepened.

Prices excluding fresh food slid 1.5 percent from a year earlier, after dropping 1.2 percent in March, the statistics bureau said in Tokyo. The jobless rate climbed to 5.1 percent from 5 percent.

“Given strong deflationary pressure in Japan, yields won’t rise too much,” said Takeshi Minami, chief economist in Tokyo at Norinchukin Research Institute Ltd.

Japanese debt has handed investors a return of 3.9 percent in dollar terms this month, according to indexes from Bank of America Corp.’s Merrill Lynch unit. Treasuries have returned 1.4 percent and German bunds have incurred a 5.8 percent loss, the indexes show.

“Current yields are not attractive at all,” said Shinji Hiramatsu, who helps oversee the equivalent of $15.7 billion in assets at Sompo Japan Asset Management Ltd. in Tokyo. “But unless uncertainties over the credit crisis in Europe are fully removed, bonds will continue to draw buying interest as a safe haven.”