BLBG: Japan Bonds Gain as Biggest Bankruptcy in a Year Boosts Appeal
Japan’s 10-year government bonds rose, snapping a two-day drop, after the biggest bankruptcy by a publicly traded Japanese company in more than year spurred demand for the relative safety of government debt.
Yields fell toward a four-week low as local stock indexes were close to the lowest since October following the failure of SFCG Co., a Tokyo-based lender whose creditors include Citigroup Inc. Debt demand also rose amid speculation reports this week will show consumer prices and industrial production slid last month. The Ministry of Finance is due to sell 900 billion yen ($9.6 billion) of 20-year bonds tomorrow.
“Concerns about the weakness of small and medium-sized enterprises and financial institutions will be focused toward March” when the financial year ends, said Takafumi Yamawaki, a Tokyo-based senior strategist at BNP Paribas Securities Japan Ltd., a unit of France’s biggest bank. Bonds will react to the trend in stocks, he said.
The yield on the 1.3 percent bond due December 2018 fell one basis point to 1.26 percent as of 1:47 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price rose 0.088 yen to 100.349 yen. The yield has not been lower than 1.245 percent since Jan. 27. A basis point is 0.01 percentage point.
Ten-year bond futures for March delivery rose 0.21 to 139.71 at the Tokyo Stock Exchange. The Nikkei 225 Stock Average lost 1 percent. It earlier slid as much as 2.8 percent to 7,209.43, the lowest since October.
Japan’s bonds often move in the opposite direction to stocks. Benchmark 10-year yields had a correlation of 0.65 with the Nikkei in the past three weeks, according to Bloomberg data. A value of 1 means the two moved in lockstep.
Weaker Equity Risk
“There is still a risk that the equity market will remain weak, which will support JGBs,” 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. “Lower equity prices mean less risk taking.”
SFCG owes Citigroup 71 billion yen, according to a securities report filed by SFCG on Oct. 27.
Demand for government debt has risen after a record 33 publicly traded companies in Japan declared bankruptcy last year as banks cut lending and consumers stopped spending.
Japan’s bonds handed investors a return of 0.16 percent this month through Feb. 20, according to indexes compiled by Merrill Lynch & co. The Nikkei lost 6 percent in the same period.
Deflation Risk
Consumer prices, excluding fresh food, fell 0.1 percent in January from December, when they rose 0.2 percent, according to the median estimate of economists surveyed by Bloomberg News. Industrial production probably slumped 10 percent from December, according to a separate survey. Both reports are due on Feb. 27.
“Incoming economic data should underscore the deepening of the recession and growing deflationary forces, so the favorable fundamental environment for the JGB market should continue,” Tomoko Fujii, a rates and currency strategist at Banc of America Securities-Merrill Lynch Japan, wrote in a report today.
Ten-year inflation-indexed debt is yielding 2.25 percent more than similar-maturity conventional bonds, signaling investors expect consumer prices to decline over the next decade. The securities typically yield less than regular bonds because their principal payment increases at the same rate as inflation.
Deflation is emerging as a concern for policy makers worldwide. The U.S. Federal Reserve last month said there is “some risk” inflation in the U.S. would remain below rates that best foster economic growth.
Debt Auction
Demand for Japan’s bonds may be limited on speculation primary dealers will reduce holdings of debt to protect against potential losses at the auction of 20-year securities.
The prior sale Jan. 27 drew bids worth 2.88 times the amount on offer, compared with a so-called bid-to-cover ratio of 2.62 at the December sale. Last year’s average was 3.38 times.
Even so, demand for longer-dated Japanese bonds is likely to rise on speculation some investors will purchase debt to match a month-end change in a benchmark index they use to gauge performance.
Twenty-year yields fell 1.5 basis points to 1.895 percent today, while 30-year yields declined half a basis point to 1.91 percent, according to data compiled by Bloomberg.
Nomura Securities Co. increased the average duration of its Bond Performance Index by 0.06 year to 6.32 years this month, according to the company’s Web site. The duration extension into next month will be posted on the company’s Web site this week.
Money managers such as Japan’s Government Pension Investment Fund, which runs the world’s largest pool of retirement wealth, use Nomura’s index to help decide their holdings. Duration is a gauge of how much a change in yields affects the price of a bond or debt portfolio.
