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Japanese Bonds Drop; Yields Climb to Highest in Almost 4 Months

Japanese Bonds Drop; Yields Climb to Highest in Almost 4 Months

March 1 (Bloomberg) -- Japanese 10-year bonds fell, pushing yields to an almost four-month high, after an unexpected increase in household spending supported expectations the economy will rebound after falling into recession last year.

Signs of recovery may cut demand at a 1.9 trillion yen ($18.2 billion) sale of 10-year bonds this week. The securities yesterday rounded out their biggest monthly drop since June after Bank of Japan chief Toshihiko Fukui suggested yields reflect ``excessive' expectations for how long the bank will keep pumping money into the economy.

``Investors have become defensive about buying bonds before the auction, especially after Fukui's comments raised speculation about an end of monetary easing,' said Hiroaki Takai, who helps oversee the equivalent of $7.65 billion in assets at Sumitomo Mitsui Asset Management Co. in Tokyo. ``The economy will probably pick up later in the year.'

The benchmark 1.3 percent bond due in December 2014 fell 0.168 to 98.375 as of the 6:05 p.m. close in Tokyo at Japan Bond Trading Co. Its yield rose 2 basis points to 1.49 percent, after reaching 1.505 percent, the highest since Nov. 9. A basis point is 0.01 percentage point.

Ten-year bond futures for March delivery fell 0.16 to 138.03 as of the close at the Tokyo Stock Exchange.

Takai said he may wait until yields climb above 1.55 percent before buying bonds and that yields may rise to 1.8 percent before the end of September. Sumitomo Mitsui Asset is partly owned by Sumitomo Life Insurance Co. and Mitsui Mutual Life Insurance Co., the nation's fourth and fifth largest life insurers.

Signs of Recovery

Spending by households headed by a salaried worker rose 8.2 percent in January from December, the most in nine months, the government said. From a year earlier, household spending rose 2.6 percent. The median forecast of 27 economists surveyed by Bloomberg News was for a 1.2 percent decline.

Ten-year bonds slumped yesterday after the government said industrial output rose 2.1 percent, after falling 0.8 percent in December. A report also showed retail sales had the biggest jump in more than six years.

The Ministry of Finance plans to sell 7.5 trillion yen of coupon-bearing government securities this month, including 10- year bonds to be sold on March 3.

The previous 10-year sale on Feb. 3 drew bids worth 65 times the amount of debt on offer, the fifth highest on record.

Index Change

Declines in bonds were limited by speculation pension funds and other investors will add to their holdings to match a record increase in a benchmark bond index.

Nomura Securities Co., which maintains the index most Japanese pension funds follow, will today add 48 securities, including 10-, 20- and 30-year government bonds sold in February, and remove all debt due in a year or less. Money managers, such as the Government Pension Investment Fund, which holds the world's largest pool of retirement wealth totaling 51.5 trillion yen, try to match their performance to the index.

Ten-year yields near the highest since November also may lure some buyers, said investors such as Shigeru Endo at Fuji Investment Management Co. in Tokyo.

``There's underlying demand for bonds at yields near 1.5 percent,' said Endo, who helps oversee the equivalent of about $2.87 billion of fixed-income assets at Fuji Investment, a unit of Mizuho Financial Group Inc., Japan's largest lender.

The duration on the Nomura Bond Performance Index would be extended by 0.18 of a year to 5.6 years had the changes been made on Feb. 25, according to the company's Web site. Duration measures a bond price's sensitivity to changes in yield.

`Adjustment'

The Bank of Japan in March 2001 pushed overnight loan rates between banks to near zero percent by raising its target for reserves available to lenders. The bank maintained the reserve target at between 30 trillion yen and 35 trillion yen, and held rates close to zero at its two-day meeting ended on Feb. 17.

``The adjustment in bond yields may continue, especially with the 10-year auction approaching, after the central bank signaled the market hasn't fully priced in a future risk of higher yields,' said Susumu Kato, chief Asia fixed-income strategist at Lehman Brothers Japan Inc. in Tokyo. ``Japan's economy probably won't be as bad as some had anticipated.'

Kato said 10-year yields may rise to 1.6 percent by the end of June as the economy will probably rebound in the second quarter. Lehman is one of the 26 primary dealers invited to discuss bond sales with the Ministry of Finance.

Fukui, speaking at a lower house committee of the parliament in Tokyo, said the central bank won't buy new bonds directly from the government to maintain fiscal discipline.

The No. 267 bond with a 1.3 percent coupon due in December 2014 closed at 98.37 to yield 1.49 percent, according to the Bloomberg Yen Bond Fixing Price. The level is an average set at 6:30 p.m. in Tokyo by Daiwa Securities SMBC Co., Nikko Citigroup Ltd., Mizuho Securities Co. and Mitsubishi Securities Co.


LINK: http://www.bloomberg.com/apps/news?pid=10000101&sid=axfsC9H0nCYM&refer=japan