Japan’s bond futures gained for a third week on speculation the central bank will keep borrowing costs low as the government assesses funding sources for reconstruction after the country’s biggest earthquake. The extra yield investors demand to hold 40-year debt instead of five-year securities was within two basis points of the widest in a year as the Bank of Japan injected a record amount of funds into the financial system after the March 11 quake. Bonds were also bolstered as bids increased at an auction of two-year notes this week. “Expectations are rising that the central bank will have to continue the low interest-rate policy longer,” said Makoto Noji, a senior debt and foreign-exchange strategist at Nikko Cordial Securities Inc. in Tokyo. “Demand for a safe haven has spurred buying of bonds” with shorter maturities. Ten-year bond futures for June delivery rose 0.06 this week to 139.80 at the Tokyo Stock Exchange. Financial markets were closed on March 21 for a holiday. The benchmark five-year yield declined 1.5 basis points to 0.465 percent at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 0.6 percent note due March 2016 added 0.072 to 100.656 yen. Ten-year yields rose one basis point to 1.22 percent. The Bank of Japan’s 40 trillion yen ($494 billion) of successive one-day cash injections from March 14 to March 22 helped increase lenders’ deposits at the central bank to a record. The BOJ maintained its overnight lending rate last week at a range of between zero and 0.1 percent and doubled the size of its fund that bought assets including government bonds and corporate debt. Yield Spread The yield spread between 40-year debt and five-year securities was 1.85 percentage points after expanding to 1.87 percentage points on March 15, the most since March 2010. The 2.6 trillion-yen auction of two-year notes on March 24 drew bids valued at 4.77 times the amount on offer, up from a ratio of 3.70 at the offering in February. Japan may need to consider compiling an extra budget within a month to help pay for reconstruction efforts after the earthquake, Economic and Fiscal Policy Minister Kaoru Yosano said yesterday. A combination of funding sources may need to be mulled, including spending cuts, a review of taxes and bond issuance, he said. Japan’s damage from the magnitude 9.0 earthquake and subsequent tsunami was estimated at as much as 25 trillion yen, a government report showed on March 23, an amount almost four times the cost of Hurricane Katrina in the U.S. The gain in bonds was tempered as speculation the global economy is improving boosted shares. The Nikkei 225 (NKY) Stock Average climbed 3.6 percent this week. “Expectations for a global economic recovery are largely intact, which is a catalyst for bond yields to rise,” Nikko’s Noji said. “Domestic investors are reluctant to trade before the end of this fiscal year” as financial companies are closing their books and preparing earnings reports, he said. Japan’s business year ends on March 31 for most companies. To contact the reporter on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net To contact the editor responsible for this story: Nicholas Reynolds at nreynolds2@bloomberg.net

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