Japan’s benchmark bonds fell, pushing yields toward a two-month high, as the yen’s drop to near the weakest in six weeks improved the earnings outlook for the nation’s exporters. Bond futures declined after posting the biggest intraday price swing since September yesterday. Bonds also slumped as the difference between dividend yields on Japanese stocks and 10- year bond yields was near the highest level in 20 months. “Some investors are selling 10-year bonds to shorten the duration of their portfolios,” said Susumu Kato, chief economist for Japan in Tokyo at Credit Agricole CIB and CLSA, a unit of France’s largest bank by branches. “People are cautious because the yen has edged toward a weakening trend.” The yield on the 10-year bond climbed 3.5 basis points to 1.06 percent as of 6:05 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1 percent security due in September 2020 fell 0.311 yen to 99.465 yen. The yield rose to 1.09 percent yesterday, the most since Sept. 15. Ten-year futures for December delivery lost 0.43 to 141.96 at the 3 p.m. close of the Tokyo Stock Exchange. The yen depreciated to 83.59 per dollar yesterday, the least since Oct. 5, before trading at 83.44 today. The currency’s drop bolstered domestic shares, helping the Topix index increase 0.3 percent. The difference between dividend yields on Topix-listed stocks and 10-year bond yields stood at 1.05 percent. It rose to 1.29 percent on Nov. 2, a level not seen since March 2009. Higher Volatility Bond futures slid as much as 0.51 yesterday before reversing losses to gain 0.37, the biggest price swing since Aug. 30, according to data compiled by Bloomberg. Implied volatility on options for the contracts increased to 3.667 percent yesterday, the highest since Sept. 13. “The slump today is in part a reaction to the unexpected run-up in debt yesterday,” said Takafumi Yamawaki, chief rates strategist at JPMorgan Chase & Co. in Tokyo. JPMorgan is one of the 24 primary dealers obliged to bid at government debt sales. Implied volatility, a gauge of traders’ expectation for future price swings, gains as demand for options increases. Japan’s Ministry of Finance will auction 1.1 trillion yen ($13.2 billion) in 20-year debt tomorrow. Yields on 20-year bonds have gained more than 16 basis points in the past month. “We expect the auction to be absorbed smoothly, or at least without difficulty, primarily on steady buying from domestic absolute-yield buyers,” RuiXue Xu and Beomjoon Ryu, strategists RBS Securities in Tokyo, wrote in a report today. RBS Securities, a unit of Royal Bank of Scotland Plc, is another primary dealer with the government. To contact the reporters 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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