Japan's Bonds Have First Weekly Drop in Five on Economic Growth
Japan's Bonds Have First Weekly Drop in Five on Economic Growth
May 14 (Bloomberg) -- Japanese government bonds had the first weekly decline in five amid expectations a government report next week will show the economy is recovering from its fourth recession since 1991.
Ten-year yields climbed from a 14-month low of 1.21 percent reached on May 6, after an unexpected rise in machinery orders in March added to signs the economy is expanding. Growth in the first quarter was probably the fastest in a year, on an annualized basis, a Bloomberg News survey shows.
``Investors are cautious about buying below 1.2 percent,'' said Shigeru Endo, who helps oversee the equivalent of about $2.8 billion of fixed-income assets in Tokyo at Fuji Investment Management Co., a unit of Mizuho Financial Group Inc., Japan's largest lender. ``People are bullish about Japan's economy.''
The yield on the benchmark 1.3 percent bond due March 2015 ended at 1.28 percent on the week, higher than the 1.22 percent close on the prior benchmark on May 6, according to Japan Bond Trading Co., the nation's largest debt broker. Ten-year yields fell to 1.21 percent on May 6, the lowest since Feb. 26, 2004.
The 0.6 percent note due March 2010 fell 0.194 on the week to 100.662, pushing its yield up 4 basis points, or 0.04 percentage point, to 0.46 percent.
Endo is keeping the average duration of his bond holdings slightly below that of his benchmark, the Nomura Bond Performance Index. Duration is a measure of sensitivity to changes in yields and the lower a bond's duration, the less its price declines when yields rise.
The economy probably grew at an annual 2.5 percent pace in the three months ended March 31, according to the median forecast of 20 economists Bloomberg surveyed, compared with a 0.5 percent rate in the prior quarter. The report is due May 17.
Machinery Orders
``We are near the bottom for yields,'' said Keisuke Tsumoto, who helps oversee the equivalent of about $1.6 billion as head of Japanese fixed income in Tokyo at Schroder Investment Management Japan Ltd. ``The worst is over for the economy.''
Ten-year bond futures fell yesterday after a report showed machinery orders were greater than expected in March.
``A strong number is a selling factor for the Japanese government bond market,'' said Naomi Hasegawa, a fixed-income strategist in Tokyo at Mitsubishi Securities Co., whose company is part of Mitsubishi Tokyo Financial Group Inc., Japan's No. 2 bank.
Private machinery orders excluding shipping and utilities rose a seasonally adjusted 1.9 percent from February, the Cabinet Office said in Tokyo. The median forecast of 30 economists surveyed by Bloomberg News was for a 1.5 percent decline. Orders gained 4.9 percent in February.
Nikkei Falls
Ten-year bond futures for June delivery fell 0.03 yesterday, extending their decline this week to 0.40. The contract closed at 140.43 yesterday on the Tokyo Stock Exchange.
Bond prices were supported on the week as the benchmark Nikkei 225 Stock Average fell for five straight days, with a newspaper report damping the outlook for corporate profits in the semiconductor industry.
Companies that make computer chips and semiconductor parts expect product prices to drop at least until next year, the Nihon Keizai newspaper reported, citing its own survey of manufacturers.
Lower Coupon
``Bonds are likely to stay firm,'' said Takayuki Amano, a fund manager in Tokyo at Mitsubishi Asset Management Co., whose company has the equivalent of about $11.2 billion in mutual funds. ``Concerns about growth in the semiconductor industry are rearing their head.''
The Nikkei fell 1.3 percent on the week, its fourth week of declines in five.
Five-year notes slid on the week on speculation brokers sold to prevent the Ministry of Finance setting a 0.4 percent coupon, the lowest since August 2003, on debt it will auction May 17. Japan will sell 2 trillion yen ($18.7 billion) of the securities.
``There's concern a reduction in the coupon to 0.4 percent would lead to problems selling the bond,'' said Jun Ishii, chief fixed-income strategist in Tokyo at Mitsubishi Securities Co., part of Mitsubishi Tokyo Financial Group Inc., Japan's second- largest lender.
Japan has the largest sovereign bond market in the world, with 686 trillion yen in marketable securities, or $6.5 trillion, outstanding at the end of September, compared with $4.1 trillion in the U.S. at the end of March.
The No. 269 bond with a 1.3 percent coupon and due in March 2015 closed at 100.21 to yield 1.276 percent yesterday, according to the Bloomberg Yen Bond Fixing Price. The level is an average rate set at 6:30 p.m. in Tokyo by Daiwa Securities SMBC Co., Nikko Citigroup Ltd., Mizuho Securities Co. and Mitsubishi Securities Co.
To contact the reporter on this story: Chris Cooper in Tokyo at ccooper1@bloomberg.net
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