By Theresa Barraclough Dec. 9 (Bloomberg) -- Japan’s 10-year bonds declined for a third day as demand at a Ministry of Finance sale of 1.9 trillion yen ($20.5 billion) in five-year notes was lower than at the prior auction last month. Ten-year yields climbed towards the highest in two weeks as the sale drew bids worth 2.48 times the amount offered, down from a so-called bid-to-cover ratio of 3.32 times at the November sale. Demand for government securities also waned as the Tokyo interbank offered rate for yen loans, known as Tibor, increased for a 22nd consecutive day, increasing speculation higher funding costs will deter investors from borrowing to buy debt. “The upside to JGBs will be limited given the weaker than expected JGB auction,” said Keiko Onogi, a debt strategist at Daiwa Securities SMBC Co., one of the 24 primary dealers that are required to bid at auctions, in Tokyo. “Some participants may be concerned about short-term rates.” The yield on the 1.4 percent bond due December 2018 rose one basis point to 1.4 percent as of 1:15 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price fell 0.087 yen to 100.000 yen. The yield on Dec. 4 reached 1.41 percent, the highest since Nov. 25. A basis point is 0.01 percentage point. Five-year yields declined half a basis point to 0.88 percent and 20-year yields gained four basis points to 2.105 percent. Ten-year bond futures for December delivery lost 0.22 to 139.18 at the Tokyo Stock Exchange. The lowest price at the auction of the 0.9 percent securities was 0.04 yen below the average price, wider than the 0.01 yen difference at last month’s auction. The so-called tail is the difference between the lowest and the average price. The longer the tail, the fewer bids are clustered around the average price. Money-Market Rates Three-month Tibor increased every day since Nov. 6 to 0.906 percent today, according to data compiled by Bloomberg News. The difference between what the government and Japan’s banks pay to borrow for three months, the TED spread, widened to 44 basis points, compared to an average spread of 16 basis points last year, according to data compiled by Bloomberg. The gap is at the widest since Oct. 31. Demand for bonds may increase after a report showed that Japan’s economy shrank in the third quarter faster than the government initially estimated. Gross domestic product contracted at an annual 1.8 percent pace in the three months ended Sept. 30, the Cabinet Office said today in Tokyo, more than the 0.4 percent reported last month. Economists surveyed by Bloomberg predicted a 0.9 percent decline. A separate report on Dec. 15 is estimated by economists to show confidence among big manufacturers plunged to minus 23 points in December from minus three points in September. ‘Bearish Factor’ Bonds also fell after stocks in Japan, the U.S. and Europe advanced on President-elect Barack Obama’s pledge to boost the U.S. economy with the biggest public-works spending package since the 1950s. “Optimism that Obama’s large-scale measures will boost the economy is a bearish factor” for bonds, said Kazuhiko Sano, chief strategist in Tokyo at Nikko Citigroup Ltd., the Japanese unit of the second-largest U.S. bank by assets. The Nikkei 225 Stock Average gained for a third day after the Dow Jones Industrial Average advanced 3.5 percent yesterday. The MSCI Asia Pacific Index climbed 0.5 percent today. Japan’s bonds often move in the opposite direction to stocks. Ten-year yields had a correlation of 0.76 with the Nikkei 225 in the past two weeks, according to Bloomberg data. A value of 1 means the two moved in lockstep. To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.

Source