Japanese bonds fell for the first time in three days after an unexpected increase in machine orders eased concern the nation’s economy will worsen. Benchmark 10-year yields rose from near a seven-year low after European Central Bank Governing Council member Axel Weber said Europe is on a “stable” recovery path. The Federal Reserve said in minutes of the Sept. 21 session that the U.S. recovery will accelerate next year. Bonds also fell before a 600 billion yen ($7.32 billion) auction of 30-year bonds tomorrow. “Investors are alarmed by the recent rapid drop in yields and are more responsive to a selling catalyst,” said Akitsugu Bandou, a senior economist in Tokyo at Okasan Securities Co. “The machinery-order report tempered the scenario of a worsening economy that people in the bond market had embraced.” The yield on the benchmark 10-year bond rose 2.5 basis points to 0.875 percent as of 3:30 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 0.8 percent security due September 2020 fell 0.227 yen to 99.315. The yield sank to 0.82 percent on Oct. 6, a level not seen since July 1, 2003. A basis point is 0.01 percentage point. Ten-year bond futures for December delivery dropped 0.15 to 143.91 at the Tokyo Stock Exchange. Japan’s machinery orders, an indicator of business investment in three to six months, jumped 10.1 percent in August from the previous month, a government report showed today. That compares with the 3.9 percent decline estimated by economists. Auction Tomorrow The European economy “is on a stable path toward recovery,” Weber said, according to the text of a speech delivered in New York yesterday. “I am confident that the danger of sliding back into recession is negligible.” Fed policy makers “judged the economic recovery to be continuing and generally expected growth to pick up gradually next year,” the central bank minutes said. The Fed, which will hold a meeting next month, said on Sept. 21 that it’s prepared to provide “additional accommodation” if needed. The Bank of Japan may further utilize the 5 trillion-yen fund it unveiled on Oct. 5 if it becomes necessary, Governor Masaaki Shirakawa said in parliament in Tokyo today. The fund is for purchases of government and corporate debt, exchange-traded funds and real-estate investment trusts. As central banks keep expanding balance sheets, “I won’t be surprised if the market starts taking into account inflation expectations” Kenji Sakaguchi, chief investment officer of Prudential Investment Management Japan Co., said in an interview. Japan’s 10-year yields may trade between 0.8 percent and 1.2 percent through year-end, he said. Japan’s prior sale of 30-year debt on Sept. 8 drew bids valued at 4.15 times the amount on offer, compared with a so- called bid-to-cover ratio of 4.06 in July. Primary dealers, which are required to bid at government debt sales, often reduce holdings of bonds in case prices decline before they can pass on the new securities to investors. To contact the reporter on this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net. To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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