Japanese bonds rose for a fourth week on signs the global recovery is losing momentum, boosting demand for the relative safety of debt. Benchmark yields reached the lowest level since August 2003 during the week before reports that economists said will show U.S. services activity slowed and Japan’s machinery orders declined. Japan’s debt securities fell the most in a month yesterday on speculation yields near a seven-year low will deter investors at debt sales next week. “Bond yields will stay low amid increased uncertainties about growth prospects,” said Hirokata Kusaba, a senior economist in Tokyo at Mizuho Research Institute Ltd., a unit of Japan’s second-largest banking group. The yield on the benchmark 10-year bond fell five basis points this week to 1.095 percent at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1.3 percent security due June 2020 rose 0.452 yen to 101.839 yen. The yield reached 1.055 percent on July 1, the lowest since August 2003. Ten-year bond futures for September delivery rose 0.54 this week to 141.60 at the Tokyo Stock Exchange. The Nikkei 225 Stock Average lost 5.5 percent this week, the biggest decline since the period ended May 21. Machinery Orders The Institute for Supply Management’s index of non- manufacturing businesses, which makes up almost 90 percent of the U.S. economy, slid to 55 in June from 55.4 a month earlier, according to a Bloomberg survey before the July 6 release. Japan’s machinery orders, an indicator of business investment, fell 3 percent in May following a 4 percent gain the prior month, a separate showed ahead of the July 8 report. Longer-dated bonds led gains this week as investors shifted allocations from a shorter-end of the yield curve. The difference in yield, or spread, between 10- and 20-year bonds narrowed to 67 basis points yesterday, the least since July 2009, as investors bought longer-maturity debt. “We see better investment opportunities in longer-dated bonds, which have lagged behind the recent rally in the shorter end of the yield curve,” said Akio Kato, team leader of Japanese debt at Kokusai Asset Management Co. in Tokyo, which runs the $38.5 billion Global Sovereign Open fund. A yield curve is a chart that plots the yields of bonds of the same quality and different maturities. It steepens when yields on shorter-maturity notes fall, those on longer-dated bonds rise, or both happen simultaneously. Twenty-year yield dropped 11 basis points to 1.765 percent this week. Daily Loss Bonds dropped for the first time in four days yesterday before the Ministry of Finance auctions 2.2 trillion yen in 10- year securities on July 6 and 600 billion yen of 30-year bonds two days later. Primary dealers, companies that are required to bid at government debt sales, often reduce holdings of bonds before an auction in case prices decline before they can pass on the securities to investors. “Yields have already fallen to unsustainable levels,” said Akitsugu Bandou, senior economist in Tokyo at Okasan Securities Co. “A lower coupon may throw cold water on investor demand for new bonds.” Ten-year yield rose three basis points yesterday, the biggest increase in the yield since May 27. Japan’s 10-year yields may surge to 1.75 percent by year- end as the nation’s economic recovery proves resilient, according to Nikko Cordial Securities Inc. ‘Bubble Signs’ “I’m seeing bubble signs increasingly,” Shinji Nomura, chief debt strategist in Tokyo at the unit of Japan’s third- largest banking group, said on July 1. “The economy continues to recover gradually, but yields have dropped as if taking into account a new recession. That’s widened a gap between yields and the economic outlook.” The Bank of Japan said on July 1 its Tankan survey of sentiment among large manufacturers gained 15 points to plus 1 in the second quarter, meaning optimists outnumbered pessimists for the first time in two years. The central bank in December unveiled a credit program that it later doubled to 20 trillion yen. Last month, Governor Masaaki Shirakawa and his policy board introduced a 3 trillion yen program aimed at encouraging lending to businesses. The BOJ has held its benchmark interest rate at 0.1 percent since December 2008. To contact the reporter on this story: Yasuhiko Seki in Tokyo at Yseki5@bloomberg.net.

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