Japan’s 10-Year Bonds Decline as Rising Stocks Damp Demand

July 25 (Bloomberg) -- Japan’s government bonds completed a second weekly loss after the Nikkei 225 Stock Average rose for an eighth day yesterday, the longest rally since November 2005.

Demand for the relative safety of government debt waned after speculation the global recession is easing pushed the yen down to a two-week low against the dollar on July 23, improving the outlook for exporters’ earnings. Foreign investors sold 48.9 billion yen ($515.3 million) in Japanese bonds during the week ended July 17, the Ministry of Finance said in Tokyo this week.

“The weaker yen brightens the short-term economic outlook, pushing up stocks” and that is negative for bonds, said Takashi Nishimura, a Tokyo-based analyst at Mitsubishi UFJ Securities Co., a unit of Japan’s largest bank by assets.

The yield on the 1.4 percent bond due June 2019 rose 5.5 basis points to 1.375 percent this week in Tokyo, according to Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price fell 0.484 yen to 100.217 yen. The yield touched 1.395 on July 23, the highest level since June 29.

Five-year yields gained one basis point this week to 0.675 percent. Ten-year bond futures for September delivery fell 0.18 this week to 138.40 at the Tokyo Stock Exchange.

The Nikkei 225 Stock Average climbed 1.6 percent yesterday.

Moving With Stocks

“Selling will dominate the market given the increasing correlation with stock movements,” said Koji Ochiai, a senior market economist in Tokyo at Mizuho Investors Securities Co., a unit of Japan’s second-largest bank.

Benchmark 10-year yields had a correlation of 0.75 with the Nikkei 225 in the past week, compared to a relationship of 0.42 the prior five-day period, according to data compiled by Bloomberg. A value of 1 means the two moved in lockstep.

Losses in bonds were tempered as 10-year yields near the highest level in more than three weeks attracted investors.

“The feeling of buying on dips seems to be strong,” said Shuntaro Take, a Tokyo-based portfolio manager at Tokio Marine & Nichido Fire Insurance Co., a unit of Japan’s biggest casualty insurer. “There might be a lot of people who are targeting near the 0.7 percent level to buy five-year securities.”

The difference in yield, or the spread, between 20- and 10- year Japanese debt held near the widest level since April 2008. The gap was about 77 basis points yesterday.

“Twenty-year bonds are being bought after the spread widened,” said Akio Kato, leader of a six-member team investing in Japanese bonds in Tokyo at Kokusai Asset Management Co., which runs the $47 billion Global Sovereign Open fund, the world’s second-biggest managed debt fund. “Concerns that the government will issue more bonds to spur an economic growth have pushed yields up for long-term bonds.”

The government is planning to sell a record 130.2 trillion yen in bonds this fiscal year to help pay for 25 trillion yen in stimulus measures. Japan’s bonds maturing in more than 10 years have handed investors a loss of 1.5 percent since April 1, according to indexes compiled by Merrill Lynch & Co.