Japan’s Bonds Gain as Signs of Slowing Recovery Boosts Demand

Jan. 16 (Bloomberg) -- Japan’s 10-year bonds completed the first weekly gain in almost a month as speculation the global economic recovery is losing momentum boosted demand for the relative safety of government debt.

Benchmark securities yesterday gained for a fourth day, the longest winning streak in three weeks, after a decline in U.S. retail sales boosted Treasury prices. Yields also fell to the lowest level in more than a week after the Bank of Japan said on Jan. 14 producer prices declined for a 12th month, enhancing the value of the fixed payments from debt.

“Bonds will continue on a firm tone into next week,” said Eiji Dohke, chief strategist in Tokyo at UBS Securities Japan Ltd., one of the 23 primary dealers that are required to bid at government debt sales. “The Japanese and U.S. recoveries seem to be losing momentum.”

The yield on the 1.3 percent bond due in December 2019 fell four basis points, or 0.04 percentage point, to 1.32 percent this week in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price gained 0.349 yen to 99.824 yen. Ten-year yields touched 1.315 percent yesterday, the lowest level since Jan. 5.

Ten-year bond futures for March delivery rose 0.38 this week to 139.10 at the afternoon close of the Tokyo Stock Exchange.

Retail Sales

Ten-year U.S. Treasury yields dropped five basis points on Jan. 14 when the Commerce Department said retail sales unexpectedly declined 0.3 percent in December.

“The effect of the strong Treasury market is strong,” said Kenro Kawano, a debt strategist at Credit Suisse Group AG in Tokyo. “As the economic recovery weakens during January to March, yields will have a bias to decline.”

The yield differential between the two nations’ 10-year notes, which was about 2.37 percentage points yesterday, will widen to 2.48 percentage points by the end of March, according to a Bloomberg News survey of economists and analysts with a heavier weighting on more recent forecasts.

The costs Japanese companies pay for energy and unfinished goods declined 3.9 percent last month from a year earlier, the Bank of Japan said on Jan. 14 in Tokyo.

The spread between yields on five-year notes and inflation- linked debt, which reflects the outlook among traders for consumer prices over the term of the securities, was negative 0.74 percentage point yesterday, compared with minus 0.71 percentage point at the end of last week.

Inflation-adjusted securities typically yield less than regular bonds because their principal payments increase at the same rate as inflation. Deflation, or a general drop in prices, enhances the value of the fixed interest of bonds.

40-Year Auction

Longer-maturity bonds led gains after a sale of 300 billion yen ($3.3 billion) of 40-year debt on Jan. 14 attracted the most bids since May. The 2.2 percent securities drew bids for 3.78 times the amount on offer.

“Yield declines are being led by longer-dated bonds,” said Takafumi Yamawaki, a senior strategist in Tokyo at BNP Paribas Securities Japan Ltd. “The yield curve has stopped steepening.”

The yield difference between 5- and 20-year securities reached 1.65 percentage points on Jan. 7, the widest level since 2001, according to data compiled by Bloomberg. The spread narrowed to 1.61 percentage points yesterday.

The “better-than-expected 40-year auction has had a favorable effect on the yield curve,” said Kazuhiko Sano, chief strategist in Tokyo at Citigroup Global Markets Japan Inc., a unit of New York-based Citigroup Inc. “The strength in the longer zones will continue.”