Japan’s Bonds Fall Most in Month as Recovery Signs Damp Demand

April 10 (Bloomberg) -- Japan’s bonds posted the biggest weekly decline in a month as signs the global economy is recovering damped demand for the safety of government debt.

Benchmark 10-year yields touched the highest level in five months as Bank of Japan Governor Masaaki Shirakawa said on April 7 that the economy is “picking up steadily.” Bonds also fell after U.S. reports this week showed service industries and pending home sales expanded in the world’s biggest economy, adding to signs the global recovery is gathering momentum.

“Concerns have abated about a second slump and the global economy is moving toward recovery,” said Shinji Nomura, chief debt strategist in Tokyo at Nikko Cordial Securities Inc., a unit of Japan’s third-largest banking group. “That supports long-term yields, which are linked to an economic outlook.”

The yield on the 1.4 percent bond due March 2020 rose three basis points this week to 1.385 percent at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price fell 0.264 yen to 100.130 yen. The yield climbed to 1.405 percent on April 7, the highest since Nov. 12.

Ten-year yields may increase to 1.60 percent by the end of June, according to Nomura.

Ten-year bond futures for June delivery declined 0.30 this week to 138.40 at the Tokyo Stock Exchange.

The Bank of Japan, which kept its benchmark interest rate at 0.1 percent at its April 7 meeting, refrained from expanding measures to fight deflation and said a return to recession is unlikely as the recovery begins to sustain itself.

‘High Growth’

Policy makers cited exports as a driver of the nation’s expansion, after describing stimulus measures as the main reason for the rebound in previous months. “High growth in emerging economies” is propelling shipments and production, the central bank said in a statement.

The U.S. Institute for Supply Management said on April 5 its index of non-manufacturing businesses expanded in March at the fastest pace since May 2006. U.S. pending home sales climbed the most since October 2001, the National Association of Realtors said the same day.

Bond futures rose for a second day yesterday, paring a weekly loss, on signs the government will keep pressure on the central bank to keep borrowing costs low.

Prime Minister Yukio Hatoyama and BOJ’s Shirakawa yesterday held the first in a series of regular quarterly meetings that may enable the government to press for measures to fight deflation. Finance Minister Naoto Kan, who also attended, said he asked for Shirakawa’s help to fight falling prices.

‘Put Pressure’

“The government will continue to put pressure on the BOJ to do additional easing,” said Atsushi Ito, a Tokyo-based strategist at Morgan Stanley Japan Securities Co. “Pressure may increase as there’s been no mechanism set up to overcome deflation.”

Shirakawa said he and Hatoyama didn’t discuss the central bank’s monthly 1.8 trillion yen purchases of government bonds. He explained the policy board’s assessment of the economy and finances, as well as the bank’s credit program.

Bonds also declined this week on speculation some investors reduced their holdings before the Ministry of Finance sells 600 billion yen ($6.4 billion) of 30-year bonds next week.

“Investors will be hesitant to push up long-term bonds with the 30-year sale next week,” said Akihiko Inoue, chief market analyst in Tokyo at Mizuho Investors Securities Co., a unit of Japan’s second-largest bank.

The ministry will also sell 2.4 trillion yen of five-year notes on April 15.