Japan’s Bonds Decline as Stock Gains, Recovery Signs Sap Demand

March 27 (Bloomberg) -- Japan’s 10-year bonds dropped, completing a fourth weekly loss, as the yen’s slide to its lowest since January bolstered exporter stocks.

Benchmark yields climbed yesterday to the highest level since November after Treasuries dropped the prior day, boosting U.S. rates to the most since June. Demand for bonds was also limited on speculation the Bank of Japan’s key survey of business confidence and U.S. nonfarm payrolls next week will add to signs the global economy is recovering.

“Japanese and U.S. yields are to test the higher end of their ranges,” said Shinji Nomura, chief debt strategist in Tokyo at Nikko Cordial Securities Inc., part of Japan’s third-largest banking group. “Optimism over the BOJ’s Tankan and U.S. nonfarm payrolls next week are negative factors for bonds.”

The yield on the 1.4 percent security maturing in March 2020 increased 1.5 basis points, or 0.015 percentage point, this week to 1.375 percent in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price dropped 0.132 yen to 100.219 yen. Yields climbed to as high as 1.385 percent yesterday, the most since Nov. 12.

Ten-year Treasury yields reached 3.92 percent on March 25, the highest since June 11. They were at 3.86 percent yesterday.

Futures MACD

Ten-year bond futures for June delivery slid 0.30 this week to 138.33 as of the close at the Tokyo Stock Exchange. The contracts touched 138.16 yesterday, the lowest since November. The contracts’ moving average convergence/divergence, or MACD, was minus 0.2719 yesterday, below the so-called signal line of minus 0.1569, suggesting that they are in a downtrend.

The Nikkei 225 Stock Average advanced 1.6 percent yesterday, damping demand for the refuge of government debt. Shares gained after Japan’s currency touched 92.96 yen on March 25, the weakest level since Jan. 8.

Japanese bonds were little changed on the month and quarter, according to indexes compiled by Bank of America Corp.’s Merrill Lynch unit. The Nikkei 225 gained 8.6 percent so far this month, advancing 4.3 percent this quarter.

Bonds losses were tempered on expectations lingering deflation will increase the value of coupon payments.

Japan’s consumer prices excluding fresh food slid 1.2 percent in February from a year earlier, after dropping 1.3 percent in each of the past two months, the statistics bureau said yesterday in Tokyo.

Lingering Deflation

“An end to deflation isn’t in sight anytime soon, though the pace of price declines will moderate gradually,” Azusa Kato, economist at BNP Paribas in Tokyo, said before the data.

The difference between yields on five-year notes and similar maturity inflation-linked debt, which reflects the outlook for consumer prices over the term of the securities, was negative 1.05 percentage points yesterday, compared with minus 0.85 percentage points at the end of last year.

Inflation-adjusted securities typically yield less than regular bonds because their principal payments increase at the same rate as inflation.

Ten-year yields may rise to the highest since October 2008 next quarter, following seasonal patterns where they climb on speculation U.S. interest rates will increase, Mizuho Securities Co. said.

Yield Outlook

“The tendency of Japan’s long-term yields to gain in the April-June period will remain intact this year,” said Hajime Takata, Tokyo-based chief strategist at Mizuho. “It wouldn’t be surprising if the yields rose above 1.6 percent.”

The yield on Japan’s 10-year notes increased in the second quarter of each of the past six fiscal years. The rate peaked between April and June in all those periods except for fiscal 2005. In the current year ending on March 31, the yield reached a high of 1.56 percent on June 11.

Recent economic indicators signal a recovery is taking hold in the U.S., aiding a rally in stocks that will likely help to improve investor sentiment, Takata said.

A U.S. report on April 2 will show payrolls rose 187,000 in March after dropping 36,000 the previous month, according to the median estimate of economists surveyed by Bloomberg.

Japan’s Tankan business confidence index will improve to minus 14, from December’s minus 24, according to the median estimate of economists in a Bloomberg News survey before the April 1 report. That would be the best reading since December 2008.