By Theresa Barraclough Dec. 18 (Bloomberg) -- Japan’s 10-year bonds rose for a fifth day, the longest winning streak in seven weeks, on speculation the Bank of Japan will lower interest rates at a two-day policy meeting that concludes tomorrow. Ten-year yields dropped to the lowest in almost nine months after the yen reached a 13-year high against the dollar. Gains in bonds may be limited after a Ministry of Finance auction of 1.8 trillion yen ($20.6 billion) in two-year notes drew less demand than the previous sale last month. “The short-end of the yield curve is pricing in up to a 70 percent chance of a rate-cut tomorrow,” said Tatsuo Ichikawa, a senior strategist in Tokyo at RBS Securities Japan Ltd., one of the 24 primary dealers required to bid at government auctions. “The BOJ meeting is the main focus,” Ichikawa said. The yield on the 1.4 percent bond due December 2018 fell three basis points to 1.27 percent as of 2:02 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price rose 0.268 yen to 101.152 yen. The yield is the lowest since March 31. Five-year yields declined half a basis point to 0.78 percent and two-year yields fell one basis point to 0.445 percent. A basis point is 0.01 percentage point. Ten-year bond futures for March delivery dropped 0.22 to 139.34 at the Tokyo Stock Exchange. Benchmark bonds have handed investors a return of more than 2 percent so far this year through yesterday, according to indexes compiled by Merrill Lynch & Co. The dollar dropped to 87.14 yen yesterday, the lowest level since July 1995, and recently traded at 87.71 yen. Pressure on BOJ “The yen appreciated against the dollar, increasing pressure on the Bank of Japan” to cut interest rates, said Kazuhiko Sano, chief strategist in Tokyo at Nikko Citigroup Ltd., the Japanese unit of the second-largest U.S. bank by assets. “It’s a favorable environment for bonds.” There is a 57 percent chance the BOJ will lower borrowing costs from 0.3 percent tomorrow, according to calculations by JPMorgan Chase & Co. using overnight interest-rate swaps. The odds were 53 percent yesterday. “I am not going to predetermine that measures should or shouldn’t be used,” Bank of Japan Governor Masaaki Shirakawa said on Dec. 16, when asked whether policy makers would consider reintroducing the 2001-2006 policy of pumping cash into the economy while holding borrowing costs near zero. The central bank will implement policy “appropriately,” he said. Debt Sale Today’s sale of two-year securities drew bids worth 2.4 times the amount of debt offered, down from a so-called bid-to- cover ratio of 2.8 times at the November sale. The lowest price at the auction was 0.011 yen below the average price, wider than the 0.006 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. Shirakawa on Dec. 16 said he hasn’t dismissed the possibility that the central bank may start buying short-term corporate debt, to alleviate pressure on bank lending. Companies are having difficulty selling debt as Japan’s deepening recession causes investors to shun riskier assets. The three-month Tokyo interbank offered rate for yen loans, or Tibor, fell for a second day to 0.918 percent from 0.921 percent yesterday. “Even money markets have started to price in a BOJ rate- cut, so it would be disastrous” if the BOJ doesn’t cut, said Takashi Nishimura, an analyst at Mitsubishi UFJ Securities Co., a unit of Japan’s largest bank by assets, in Tokyo. To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.

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