By Masaki Kondo and Yasuhiko Seki - Jul 21, 2010
Japan’s 20-year bonds declined for a third day on speculation primary dealers cut holdings of the securities before the government auctions 1.1 trillion yen ($12.6 billion) of the debt tomorrow.
The bonds also dropped on speculation the Ministry of Finance will reduce the coupon at the sale from last month’s 2 percent. Ten-year bond futures rose for the first time in three days as the stronger yen clouded the outlook for corporate earnings and drove down Japanese shares.
“The coupon at tomorrow’s auction of 20-year bonds is likely to be lowered to 1.8 percent, the lowest since 2004,” said Akitsugu Bandou, senior economist at Okasan Securities Co. in Tokyo. “I have doubts as to whether bonds with coupons this low will sell well.”
The yield on the 20-year bond rose one basis point to 1.805 percent as of 4:12 p.m. at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 2 percent security due June 2030 fell 0.151 yen to 102.855 yen.
The benchmark 10-year yield dropped half a basis point to 1.085 percent. Ten-year bond futures for September delivery gained 0.09 to 141.70 as of the afternoon close on the Tokyo Stock Exchange.
The previous auction of 20-year securities on June 16 drew bids for 4.6 times the amount on offer, compared with a so- called bid-to-cover ratio of 3.93 at the May sale.
Primary dealers, which are required to bid at government debt sales, often reduce holdings of bonds before an auction in case prices decline before they can pass on the new securities.
Loan Demand
Bond futures gained on speculation falling appetite for loans will encourage banks to put more money into bonds.
An index of demand for loans to businesses slid to minus 17 in July from minus 10 three months ago, the Bank of Japan said today. The number has been negative for five quarters.
“Given weak corporate demand for new loans, underlying demand for government bonds from Japanese banks remains strong,” said RuiXue Xu , a strategist in Tokyo at RBS Securities Japan Ltd., part of Royal Bank of Scotland Group Plc.
Some investors also sold government bonds as the extra yield offered by shares over that of debt widened yesterday toward the most in a year.
The spread between dividend yields on the Nikkei 225 Stock Average and 10-year debt expanded to 61.77 basis points yesterday, approached the 66.29 basis points gap on July 1, which was the most since July 17, 2009.
“Equities are now looking to be more attractive than bonds, given such indicators as dividend yields,” said Ayako Sera, a strategist in Tokyo at Sumitomo Trust & Banking Co., which manages the equivalent of $310 billion. “While there is concern about the global recovery, we believe it will stay intact.”
The Nikkei 225 fell for a fourth day, losing 0.2 percent. The yen strengthened 0.4 percent to 87.17 per dollar approaching its seven-month of 86.27 set July 16.
To contact the reporters on this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net.
From Bloomberg published on July 21, 2010