Friday, May 29, 2009

“Bonds were sold as economic data was better than expected,”

TO BE NOTED: From Bloomberg:

"Japan Bonds Complete Longest Loss Since 2006 on Recovery Signs

By Theresa Barraclough

May 30 (Bloomberg) -- Japanese bonds completed a third month of losses, the longest stretch since April 2006, on signs the recession in the world’s second-largest economy is easing.

Benchmark 10-year yields yesterday climbed toward the highest since November after a government report showed industrial production rose the most in 56 years as a rebound in exports helps the economy emerge from its worst recession since World War II. Japan’s so-called yield curve steepened this month, with the difference in yields between 2- and 10-year bonds expanding to the widest since May 2006.

“Bonds were sold as economic data was better than expected,” said Masaaki Tonami, manager of the global investment department at Sompo Japan Insurance Inc. in Tokyo.

The yield on the benchmark 10-year bonds rose 5.5 basis points, or 0.055 percentage point, to 1.485 percent this week in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price fell 0.043 yen to 100.128 yen.

Twenty-year bonds posted a five-month drop, with yields adding 14 basis points to 2.155 percent in May.

Ten-year bond futures for June delivery fell 0.58 this month to 136.41 at the Tokyo Stock Exchange.

Japan’s industrial production rose 5.2 percent from March, the second monthly gain, the Trade Ministry said yesterday in Tokyo. The increase was faster than the 3.3 percent economists estimated, and companies said they planned to boost output in May and June as well.

Curve Tilts

“The strong production data promotes selling of bonds,” said Yasunari Ueno, chief market economist in Tokyo at Mizuho Securities Co., a unit of Japan’s second-largest lender.

Demand for debt also waned on concern investors will struggle to absorb increases in supply as the government seeks to fund stimulus spending. The Ministry of Finance last month said it will boost bond issuance by 15 percent to 130.2 trillion yen ($1.4 trillion) in the fiscal year started April.

The gap between 2- and 10-year yields expanded to 1.15 percentage points yesterday, according to data compiled by Bloomberg. The spread is likely to narrow to 0.99 percentage point by the end of June, a weighted Bloomberg survey of analysts showed.

A yield curve is a chart that plots the yields of bonds of the same quality, but different maturities. It steepens when yields on shorter-maturity notes fall, those on longer-dated bonds rise, or both happen simultaneously.

Return of Deflation

Holders of Japanese bonds incurred a loss of 0.2 percent since the end of April through May 28, according to indexes compiled by Merrill Lynch & Co. Japan’s stocks added 7.9 percent in the same period including reinvested dividends. The Nikkei 225 Stock Average rose 0.8 percent yesterday to 9,522.50.

Declines in bonds were limited on speculation the economy is on the brink of returning to deflation, easing concern higher prices will erode the value of the fixed payments of debt. Japan’s consumer prices excluding fresh food fell 0.1 percent in April, the second month of declines, the statistics bureau said in Tokyo yesterday.

“This is the beginning of the deflationary period in Japan,” said Takashi Nishimura, a Tokyo-based analyst at Mitsubishi UFJ Securities Co., a unit of Japan’s largest bank by assets. “This condition is favorable for the JGB market.”

Ten-year inflation-linked bonds yesterday yielded 2.21 percent more than similar-dated conventional debt, signaling investors expect the world’s second-largest economy to enter deflation. The securities typically yield less than regular bonds because their principal payment increases at the same rate as inflation.

Nomura Extension

Bond losses were also limited on speculation money managers such as Japan’s Government Pension Investment Fund, which oversees the world’s largest pool of retirement wealth, bought debt to match an index change by Nomura Securities Co.

“There is decent support around 1.5 percent, especially with month-end buying,” said Kazuhiko Sano, chief strategist at Nikko Citigroup Ltd. in Tokyo.

Nomura increased the average duration of its index by 0.14 year to 6.38 years into next month, according to the company’s Web site. Duration is a gauge of how much a change in yields affects the price of a bond portfolio.

To contact the reporter on this story: Theresa Barraclough in Tokyo at"

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