By Wes Goodman Sept. 15 (Bloomberg) -- Treasuries snapped a two-day gain after Japan sold yen, buoying stocks in the nation and making it more expensive for investors there to buy overseas assets. U.S. debt gave up initial gains as Bank of Japan Governor Masaaki Shirakawa said he hoped the sales would stabilize the foreign-exchange market after the currency’s climb to a 15-year high against the dollar threatened to slow exports. The Federal Reserve prepared to buy Treasuries due from September 2014 to August 2016 today as part of its plan to spur the U.S. economy by keeping benchmark borrowing rates low. “The gain in stocks is bad for bonds,” said Kazuaki Oh’e, a debt salesman in Tokyo at Canadian Imperial Bank of Commerce, the nation’s fifth-largest lender. “This is the best way for them to support the Japanese economy. Money is shifting to equities.” The yield on the benchmark 10-year note climbed one basis point to 2.69 percent as of 7:01 a.m. in London, according to BGCantor Market Data. The 2.625 percent security due in August 2020 fell 3/32, or 94 cents per $1,000 face amount, to 99 13/32. The note rose 3/32 earlier today. Japan’s Nikkei 225 Stock Average gained 2.3 percent, the biggest gain since July 28. The yen slid 2.2 percent to 84.85 per dollar, after strengthening to 82.88 earlier today, the strongest since May 1995. The currency has still climbed 9.6 percent this year as a sovereign-debt crisis in Europe and a slowing U.S. economic recovery boosted demand for safer assets. Kan’s Reelection The currency sales came a day after Prime Minister Naoto Kan won reelection as the head of Japan’s ruling party, beating a candidate who had called for intervention to help the nation’s exporters. It was the first time Japan had stepped into the foreign-exchange market since 2004. Osamu Suzuki, chairman of Shizuoka, Japan-based Suzuki Motor Corp., said Aug. 26 the strong yen poses an “extremely grave” situation and will have a “very big impact” on profit. Japanese bonds rose after Moody’s Investors Service said Kan’s policy supports the stable outlook on its Aa2 debt rating. The 10-year bond yield fell 6.5 basis points to 1.04 percent. Treasuries advanced in early Asian trading as economists said a Federal Reserve report will show industrial production slowed last month. “Yields may go down further,” said Kei Katayama, who helps oversee the equivalent of $54.7 billion as leader of the foreign fixed-income group at Daiwa SB Investments Ltd. in Tokyo. “The U.S. economic data are mixed.” Output Cooling Industrial production increased 0.2 percent last month after rising 1 percent in July, according to the median estimate of 78 economists surveyed by Bloomberg News. Treasuries climbed yesterday on speculation the Fed will announce more purchases of the securities this year to support the recovery. A new round of monetary easing by the Fed would probably provide a mild boost to the economy, Jan Hatzius, chief economist at Goldman Sachs Group Inc. in New York, said in a conference call. Global sovereign bonds have returned almost 13 percent since Lehman Brothers Holdings Inc. collapsed two years ago, according to Bank of America Merrill Lynch indexes, as investors sought the relative safety of debt. The MSCI World Index of shares delivered a 4.4 percent loss in the period after accounting for dividends. Looking for Opportunities Bill Gross, who runs the world’s biggest mutual fund at Pacific Investment Management Co. is looking for opportunities in sovereign bonds. “Pimco Total Return currently is employing what we call a ‘safe spread’ strategy, which seeks to identify sovereign countries best able to handle a new normal global economy that envisions slower growth and therefore increasing credit risks in fixed-income markets,” Gross wrote. Pimco is recommending bonds in Canada, Australia, China, South Korea, Brazil and Mexico, David Fisher, head of global product management, said on a conference call July 13. “Safe spread also attempts to capitalize on the duration and curve roll-down elements of these favored sovereign bond markets, the U.S. being the primary example,” Gross, who is based in Newport Beach, California, said in his e-mail. As a bond approaches maturity or “rolls down,” it is valued at successively lower yields and higher prices, according to Pimco’s website. Using this strategy, the security is held for a period of time as it appreciates in price and is sold to realize the gain, the website says. The strategy works when longer maturities yield more than shorter ones. The difference between two- and 10-year rates yields was 2.19 percentage points, versus the average of 1.11 percentage points for the past decade. The $248 billion Total Return Fund returned 8.8 percent this year, beating 79 percent of its peers, according to data compiled by Bloomberg. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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