Japan’s Longer-Maturity Bonds Decline as Record Debt Sales Loom

Japan’s longer-maturity government bonds fell for a second week on speculation record debt sales will outweigh signs of an economic slowdown.

Twenty-year yields approached the highest level in three weeks before the Ministry of Finance sells 4.9 trillion yen ($51.5 billion) in two-, five- and 20-year debt in the coming weeks. Demand for bonds also waned as Asian shares advanced after a measure of banks’ borrowing costs fell in London by the most in eight weeks, suggesting government and central bank policies are helping to ease the global credit crisis. A government report yesterday showed machinery orders fell less than expected in March.

“As supply will increase from July onwards, there’s a risk to buying bonds,” said Eiji Dohke, chief strategist in Tokyo at UBS Securities Japan Ltd., a primary dealer required to bid at government debt sales. “As stocks are firmer, it’s difficult” for investors to purchase debt, he said.

The yield on the 2.1 percent bond maturing March 2029 rose five basis points this week to 2.09 percent at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price fell 0.707 yen to 100.140 yen. The yield climbed 1.5 basis points yesterday.

Thirty-year yields increased one basis point, or 0.01 percentage point, this week to 2.185 percent, while 10-year yields declined 2.5 basis points to 1.425 percent. Ten-year bond futures for June delivery added 0.28 to 137.04 this week at the Tokyo Stock Exchange.

Yield Curve

The so-called yield curve steepened this week with the spread between five-year and 20-year debt expanding to 1.285 percentage points from 1.195 percentage points last week, according to data compiled by Bloomberg. A yield curve is a chart that plots the yields of bonds with the same quality, but with different maturities.

Government debt handed investors a loss since the start of the fiscal year on April 1 as Prime Minister Taro Aso unveiled record spending plans to counter the recession. Aso has announced three stimulus plans, totaling 25 trillion yen, or more than 5 percent of gross domestic product, since taking office in September.

“Concerns about the increase in supply cannot be wiped out,” said Kazuhiko Sano, Tokyo-based chief strategist at Nikko Citigroup Ltd., a unit of New York-based Citigroup Inc.

The finance ministry on April 27 said it will boost sales of bonds to 130.2 trillion yen this fiscal year from the originally planned 113.3 trillion yen. Japanese government debt handed investors a loss of 0.4 percent since March 30, according to Merrill Lynch & Co. indexes.

Shares Gain

Demand for debt also declined yesterday as the Nikkei 225 Stock Average added 1.9 percent and the MSCI Asia Pacific Index of regional shares advanced for a third day this week.

The London interbank offered rate, or Libor, for three- month dollar loans fell three basis points on May 14 to 0.854 percent, according to the British Bankers’ Association. The gauge for yen loans fell to 0.535 percent on May 14, near the least since February 2007.

The decline in bonds was tempered before a government report next week that economists said will show the world’s second-largest economy contracted the most since World War II.

The economy shrank an annualized 15.9 percent in the three months ended March 31, according to the median estimate in a Bloomberg survey before the May 20 report.

Orders for Japanese machinery, an indicator of capital investment in the next three to six months, fell 1.3 percent in March from February, the Cabinet Office said yesterday. Economists surveyed by Bloomberg estimated a 4.6 percent decline.

‘Unwinding’

“The unwinding of optimism that the global economy is headed for recovery is supportive for yield declines,” said Naomi Hasegawa, a senior bond strategist in Tokyo at Mitsubishi UFJ Securities Co., a unit of Japan’s largest lender by assets.

Yields are likely to fall to 1.28 percent by the end of September, according to a weighted Bloomberg survey of analysts. Should those predictions prove accurate, investors who bought the debt yesterday, would make a 1.7 percent return, Bloomberg calculations show.