Japan’s Bonds Decline as Global Equity Gains Damp Safety Demand

Oct. 10 (Bloomberg) -- Japanese bonds declined after advancing stocks worldwide reduced investor demand for the relative safety of government debt.

Benchmark yields increased from near an eight-month low after Alcoa Inc. started the earnings season with an unexpected profit and U.S. jobless claims dropped. Japan’s machinery orders, an indicator of capital spending in the next three to six months, rose 0.5 percent in August, rebounding from a 9.3 percent decline in July, the Cabinet Office said yesterday in Tokyo.

“Good earnings and economic data enhance risk sentiment,” said Koichi Kurose, chief strategist in Tokyo at Resona Bank Ltd., part of Japan’s fourth-largest banking group. “Ample liquidity from active stimulus and monetary easing will continue to shift to riskier assets from safe-haven assets.”

The yield on 10-year bonds rose three basis points this week to 1.280 percent at Japan Bond Trading Co., the nation’s largest interdealer debt broker.

Ten-year bond futures for December delivery dropped 0.48 this week to 139.13 yen, while the Nikkei 225 Stock Average advanced 2.9 percent.

Japan’s 10-year yields had a correlation of 0.7 with the Nikkei 225 in the past three weeks, according to Bloomberg data. A value of 1 means the two moved in lockstep.

Ten-year yields reached 1.24 percent on Oct. 6, the lowest since Jan. 27. A basis point is 0.01 percentage point.

No ‘Double-Dip’ Recession

“Bond yields, which are already at unsustainable levels, will rise,” said Taro Saito, senior economist in Tokyo at NLI Research Institute Ltd., a unit of Japan’s biggest life insurer. “The Japanese economy won’t slip into a double-dip recession, even though the recovery path is slow.”

The MSCI World Index of stocks gained more than 4 percent this week after the U.S. government said first-time jobless claims slid to 521,000 last week, the lowest since January. Economists in a Bloomberg News survey estimated 540,000 claims.

Global shares also advanced after Alcoa, the first company in the Dow Jones Industrial Average to report earnings, said profit excluding certain items was 4 cents a share, beating the average analyst estimate for a 9-cent loss.

Japan’s Ministry of Finance will sell 2.3 trillion yen ($25.9 billion) in five-year notes on Oct. 15. Primary dealers, which are required to bid at government debt sales, often reduce holdings of bonds in case prices decline before they can pass on the new securities to investors.

Debt Supply

“Given the fact that supply and demand conditions for short- and mid-term notes are gradually deteriorating, the yield curve may flatten,” said Kazuhiko Sano, chief strategist in Tokyo at Citigroup Global Markets Japan Inc., one of the 23 primary dealers that are required to bid at bond auctions.

The extra yield on 30-year bonds over five-year notes narrowed to as low as 1.54 percentage points on Oct. 8, the least since July. A yield curve is a chart that plots the yields of bonds of the same quality, but different maturities. It steepens when yields on shorter-maturity notes fall, those on longer-dated bonds rise, or both happen simultaneously.

Japan’s debt burden will probably rise to 197 percent of gross domestic product next year, according to the Organization for Economic Cooperation and Development. The Finance Ministry in April said it will boost bond issuance by 15 percent to 130.2 trillion yen this fiscal year.

Bond losses were limited on speculation the yen’s recent gains will hurt exporters’ profits.

“No exporter can survive at the current exchange rate,” said Kazuto Uchida, chief economist in Tokyo at Bank of Tokyo Mitsubishi UFJ Ltd., a unit of Japan’s biggest banking group. “The appreciation of the yen will thus strengthen downside risks for Japan, thereby supporting bonds.”

Japanese companies forecast the currency will average 94.50 in the year to March 2010, according to the Bank of Japan’s Tankan survey released Oct. 1. The yen reached 88.01 per dollar on Oct. 7, the strongest level since January.