By Theresa Barraclough April 1 (Bloomberg) -- Japan’s bonds had the biggest gain in four months as 10-year yields at the highest level since November lured investors seeking to accumulate positions for the financial year that started today. Benchmark debt yesterday completed the worst quarter in a year amid increasing signs the global economy is recovering. The Bank of Japan’s Tankan survey today showed business confidence was the strongest since September 2008. Thirty-year bonds rose for a second day on bets persistent deflation will enhance the value of the fixed payments of debt. “Investors are buying back bonds at the start of this fiscal year, having sold them at the end of last year,” said Kazuya Ito, a fund manager in Tokyo at Daiwa SB Investments Ltd. The yield on the 1.4 percent bond due March 2020 fell four basis points, or 0.04 percentage point, to 1.355 percent as of 3:01 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The rate earlier reached 1.4 percent, matching the highest since Nov. 12. The price added 0.351 yen to 100.394 yen. Thirty-year bond yields dropped four basis points to 2.255 percent. Ten-year bond futures for June delivery gained 0.47 to 138.69 as of the afternoon close on the Tokyo Stock Exchange. Ten-year securities initially dropped after the Bank of Japan’s Tankan survey showed business confidence was at the highest since September 2008. Recovery ‘Confirmation’ The Tankan index of sentiment climbed to minus 14 in March, the highest level since September 2008, the central bank said in Tokyo today. The reading matched the median forecast of 23 economists in a Bloomberg News survey. A negative number means pessimists outnumber optimists. “The Tankan is a confirmation the economy is improving,” said Takashi Nishimura, an analyst in Tokyo at Mitsubishi UFJ Securities Co., a unit of Japan’s largest bank by assets. “It increases positive expectations for a recovery, and that is negative for the JGB market.” Ten-year yields may climb to as high as 1.6 percent in the next three months, Nishimura said. Should yields end this quarter at that rate, investors who buy the debt today would incur a 1.7 percent loss, Bloomberg calculations showed. “The Tankan adds to evidence that the economy is improving in line with the bank’s view and signals no need for further easing now,” Susumu Kato, chief economist at Credit Agricole CIB and CLSA in Tokyo, said before the report. “Still, the bank may need to hold onto the current extremely accommodative policy as long as deflation persists.” The Bank of Japan last month doubled a lending program for commercial banks to 20 trillion yen ($217 billion) following government calls for it to do more. BOJ Governor Masaaki Shirakawa and his policy board will meet on April 6-7. Lingering Deflation Japan’s consumer prices excluding fresh food slid 1.2 percent from a year earlier in February, after dropping a 1.3 percent in each of the preceding two months, the statistics bureau said on March 26 in Tokyo. The difference between yields on five-year notes and similar maturity inflation-linked debt, which reflects the outlook for consumer prices over the term of the securities, was negative 1.09 percentage points today, compared with minus 0.85 percentage points at the end of last year. Inflation-adjusted securities typically yield less than regular bonds because their principal payments increase at the same rate as inflation. Ten-year yields are likely to decline to 1.3 percent by the end of this quarter, according to the median estimate of economists in a weighted Bloomberg survey. The BOJ is unlikely to raise interest rates from 0.1 percent this year, a similar survey showed. Japan Post Japan Post Bank Co. has cut its budget for the amount of government bonds it will purchase this financial year by about 30 percent, a government document showed. The bank set a quota of 21.73 trillion yen to buy Japanese government bonds, compared with an initial budget to purchase 31.09 trillion yen of the securities in the 12 months ended March 31, said a document on the Web site of the Management Organization for Postal Savings and Postal Life Insurance. The change “represents a somewhat negative factor for JGB supply and demand,” Chotaro Morita, chief strategist at Barclays Capital Japan Ltd., wrote in a report. “But if the main factor behind the decrease is the drop in redemptions, it means redemptions in other sectors will see a corresponding increase and the overall money flow back into the JGB market may not change all that much.” To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.

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