Japan’s Bonds Gain Most This Year as Banks Invest Excess Cash

April 17 (Bloomberg) -- Japanese bonds rose, completing the largest weekly gain in four months, on speculation banks with excess cash bought debt to secure stable returns.

Five-year notes yesterday had the first two-day advance in a month as the lowest Tokyo interbank offered rate, or Tibor, in almost four years reduced the cost to borrow money for debt purchases. Bonds also rose as Asian stocks slid from a 20-month high, boosting demand for the refuge of government debt.

“The sentiment has been, and will continue to be, positive for bonds,” said Kazuhiko Sano, chief strategist in Tokyo at Citigroup Global Markets Japan Inc., a unit of New York-based Citigroup Inc. “The abundance of funds at banks means that their bond-buying potential is huge.”

The yield on the 1.4 percent security due March 2020 fell 4.5 basis points this week to 1.34 percent, the lowest since March 24, at Japan Bond Trading Co., the nation’s largest interdealer debt broker. That was the largest decline since the week ended Dec. 18. A basis point is 0.01 percentage point.

Ten-year bond futures for June delivery rose 0.53 to 138.93 this week at the Tokyo Stock Exchange.

Five-year yields slid 3.5 basis points this week to 0.51 percent after a 2.4 trillion yen ($25.9 billion) auction of the securities on April 15 drew the highest demand since April 2005.

The yield differential between five- and 10-year bonds narrowed to 83 basis points yesterday from 85 points on April 6, the widest spread since March 2005.

‘Larger Carry’

“The preference is mid-term sectors at the moment, but longer-maturities are becoming more attractive because of their larger carry,” said Kenro Kawano, a debt strategist at Credit Suisse Group AG in Tokyo. “It’s just a matter of time before the downward pressure on yields shifts to longer-term bonds.”

Three-month Tibor fell for a 14th day yesterday declining to 0.405 percent, from 0.407 percent on April 15 and 0.438 percent on March 31, the end of last fiscal year, according to the Japanese Bankers Association.

Meiji Yasuda Life Insurance Co., Japan’s third-largest life insurer, said in a statement released on April 14 that it will boost yen-denominated bond holdings by 1.04 trillion yen this financial year as it seeks more stable returns.

Meiji Yasuda follows larger rival Dai-ichi Life Insurance Co., which this month had the world’s biggest initial share offering in two years, and said this week it will boost holdings of yen-denominated debt in 2010 amid signs the government may withdraw stimulus measures.

U.S. Labor Data

Treasuries gained and Asian stocks fell after a April 15 report showed initial U.S. jobless claims unexpectedly rose last week to the highest level since Feb. 20, spurring concern a weak labor market will weigh on the world’s largest economy.

“Bonds are rising following gains in Treasuries, amid stock declines,” said Atsushi Ito, a Tokyo-based strategist at Morgan Stanley Japan Securities Co.

The difference in yields between 10-year debt in the U.S. and Japan was at 2.47 percentage points yesterday, from 2.50 percentage points at the start of this business year, according to data compiled by Bloomberg.

The Nikkei 225 Stock Average dropped 1.5 percent yesterday. Ten-year yields have a correlation of 0.5 with the Nikkei 225 so far this month, compared with a relationship of 0.4 in the year ended March 31, according to Bloomberg data. A value of 1 would mean the two moved in lockstep.