Japanese Bonds Gain for Fourth Week as Producer Prices Slide

July 11 (Bloomberg) -- Japanese bonds rose for a fourth week after a central bank report showed producer prices fell at a record pace, helping boost the purchasing power of the fixed payments from debt.

Ten-year yields approached a three-month low yesterday after the Bank of Japan said the costs companies pay for commodities and unfinished goods tumbled 6.6 percent in June from a year earlier, after sliding a revised 5.5 percent in May. Demand for bonds this week was tempered as technical charts suggested the recent rally in the securities was excessive.

“The latest producer prices show demand remains much weaker than supply, helping bonds,” said Akio Kato, leader of a six-member team investing in Japanese bonds in Tokyo at Kokusai Asset Management Co., which runs the world’s second-biggest debt fund and has $73 billion in assets.

The yield on the 1.4 percent bond maturing in June 2019 fell two basis points this week to 1.295 percent at Japan Bond Trading Co., the nation’s largest interdealer debt broker. Yields declined to 1.27 percent on July 9, the lowest level since March 25.

Twenty-year yields fell half a basis point this week to 1.995 percent. Ten-year bond futures for September delivery added 0.40 to 138.84 this week at the Tokyo Stock Exchange.

Inflation Bonds

Five-year inflation bonds yesterday yielded 1.59 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.

Gains in bonds were limited as technical charts traders use to predict prices suggested the 15 percent gain in 10-year securities and the 8 percent advance in 20-year debt over the past month were excessive.

“Ten-year and 20-year bonds are showing signs that they are struggling to live below 1.3 percent and 2 percent respectively,” Peter Wilson, a yen strategist in London at the local subsidiary of Mitsubishi UFJ Financial Group Inc., Japan’s largest bank by assets, wrote in a note on July 9.

The 14-day relative strength index on 10-year yields was 26 on July 9, below the 30 level that suggests the securities are poised to change direction. The stochastic oscillator on 20-year yields dropped to 5 on July 9, less than the 20 level that signals yields are likely to rebound. A stochastic oscillator chart measures the closing price of a security relative to its highs and lows to try to predict whether it will rise or fall.

Pimco Buys

Pacific Investment Management Co., which runs the world’s largest bond fund, said investors who avoid Japanese government debt may miss out on a rally.

Japan’s benchmark bonds may gain this year, pushing 10-year yields to the lowest since August 2003, as the world’s second- largest economy struggles to emerge from its worst postwar recession and avoid a deflationary spiral, said Tomoya Masanao, a Pimco executive vice president in Tokyo. The Newport Beach, California-based company manages $756 billion in assets.

“There is a huge risk not holding bonds,” Masanao said in an interview with Bloomberg News on July 8. “The growth rate won’t rise much and inflation will remain low.”

Japan’s economy is likely to contract 6 percent in the fiscal year that started April 1, the International Monetary Fund said this week. Economists in a Bloomberg News survey said Japan’s quarterly growth rate will remain below 3 percent through the three months ending June 30, 2010. Consumer prices, excluding fresh food, slid a record 1.1 percent in May from a year earlier, the statistics bureau said last month.