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Japan's Bonds Have Weekly Drop on Faster Growth Before Auction
By Keiko Ujikane
Nov. 18 (Bloomberg) -- Japan's 20-year bonds had the first weekly drop in a month on speculation traders sold to protect against possible losses at an 800 billion yen ($6.8 billion) debt issue next week amid a strengthening economy.
Brokerages that bid at auctions often cut holdings in case prices drop before they can pass on the debt to investors. Twenty-year bonds ended three weeks of gains after a government report showed the economy grew at twice the pace expected in the third quarter.
``The growth report restored confidence among investors on Japan's economy, which was a driver for this week's decline in bonds,'' said Susumu Kato, chief strategist at Calyon Securities, one of the 25 primary dealers that are required to bid at auctions. ``Twenty-year bonds also were weak as brokers prepared for the auction.''
The yield on the 2.3 percent bond due in September 2026 rose 2.5 basis points to 2.165 percent this week, according to Japan Bond Trading Co., the nation's largest interdealer debt broker. A basis point is 0.01 percentage point.
The benchmark 10-year bond also slumped, ending a three- week advance. The yield on the 1.8 percent bond due in September 2016 climbed 3.5 basis points to 1.71 percent.
The Ministry of Finance's 20-year bond auction will be on Nov. 21. Market yields suggest the government will set a 2.2 percent coupon, lower than the 2.3 percent rate on the debt sold last month. The prior sale on Oct. 24 drew bids worth 4.17 times the amount of debt sold, the most since May 2005.
``There should be some adjustments ahead of the auction, putting the longer bonds under pressure to fall,'' said Tatsuo Ichikawa, a fixed-income strategist at ABN Amro Securities Japan Ltd., another primary dealer. ``A 2.2 percent coupon on new debt is less attractive.''
Fukui Comments
Prices on three-month Euroyen futures, the most sensitive to a change in interest-rate expectations, gained yesterday after Bank of Japan Governor Toshihiko Fukui suggested a rate increase by the bank in December isn't likely.
``Our policy judgment won't be restricted'' by the build up of inventories at electronics and high-technology companies, Fukui told reporters in Melbourne yesterday. ``That doesn't necessarily mean the chances for a December rate increase is particularly high.''
The central bank hasn't ruled out any time for increasing rates, Fukui said Nov. 16 after policy makers voted unanimously to keep the key overnight lending rate at 0.25 percent.
``The market was a little bit ahead of itself in pricing in the possibility of a December rate hike,'' said Takashi Fujiwara, at Resona Bank Ltd., a unit of Resona Holdings Inc., Japan's fourth-biggest lender by assets.
Yields on three-month Euroyen futures for December delivery fell to 0.565 percent yesterday, down from 0.59 percent before Fukui's comments on Nov. 16.
Rate Outlook
Of 16 economists surveyed by Bloomberg News, 10 said the central bank will lift the key rate in the first quarter. Four said an increase could come at the next two-day policy meeting ending Dec. 19.
The central bank raised its target for overnight lending rates to 0.25 percent from near zero percent in July for the first time in six years.
Longer-maturity debt dropped and short-term notes gained yesterday, causing the so-called yield curve to steepen.
The gap in yields between two- and 20-year debt widened to about 1.37 percentage points yesterday after reaching 1.35 percentage points a day earlier, the narrowest since May 31.
``Twenty-year bonds have become expensive relative to shorter debt,'' said Calyon's Kato. ``There were some unwinding of the flattening positions'' that had bought longer debt and sold shorter notes.
Economic Growth
Bonds also dropped on speculation demand for exports will increase after a U.S. report showed manufacturing in the Philadelphia area expanded for the first time in three months.
Faster growth in the U.S. may help extend Japan's longest postwar expansion. Exports account for a 10th of the Japanese economy. The Federal Reserve Bank of Philadelphia's general economic index rose to 5.1 this month from minus 0.7 in October, a report showed on Nov. 16.
``The U.S. economy may achieve a soft landing, meaning there's no need for the Fed to cut rates,'' said Naruki Nakamura, who helps manage the equivalent of about $3.4 billion of bonds in Tokyo at Fischer Francis Trees & Watts, which is partly owned by BNP Paribas SA, France's largest bank. ``That may provide fewer obstacles for the BOJ to raise rates.''
Japan's economy grew at an annual 2 percent pace in the third quarter, the government said on Nov. 14, double the 1 percent median forecast of economists surveyed by Bloomberg News.
Japan's Bonds Have Weekly Drop on Faster Growth Before Auction
By Keiko Ujikane
Nov. 18 (Bloomberg) -- Japan's 20-year bonds had the first weekly drop in a month on speculation traders sold to protect against possible losses at an 800 billion yen ($6.8 billion) debt issue next week amid a strengthening economy.
Brokerages that bid at auctions often cut holdings in case prices drop before they can pass on the debt to investors. Twenty-year bonds ended three weeks of gains after a government report showed the economy grew at twice the pace expected in the third quarter.
``The growth report restored confidence among investors on Japan's economy, which was a driver for this week's decline in bonds,'' said Susumu Kato, chief strategist at Calyon Securities, one of the 25 primary dealers that are required to bid at auctions. ``Twenty-year bonds also were weak as brokers prepared for the auction.''
The yield on the 2.3 percent bond due in September 2026 rose 2.5 basis points to 2.165 percent this week, according to Japan Bond Trading Co., the nation's largest interdealer debt broker. A basis point is 0.01 percentage point.
The benchmark 10-year bond also slumped, ending a three- week advance. The yield on the 1.8 percent bond due in September 2016 climbed 3.5 basis points to 1.71 percent.
The Ministry of Finance's 20-year bond auction will be on Nov. 21. Market yields suggest the government will set a 2.2 percent coupon, lower than the 2.3 percent rate on the debt sold last month. The prior sale on Oct. 24 drew bids worth 4.17 times the amount of debt sold, the most since May 2005.
``There should be some adjustments ahead of the auction, putting the longer bonds under pressure to fall,'' said Tatsuo Ichikawa, a fixed-income strategist at ABN Amro Securities Japan Ltd., another primary dealer. ``A 2.2 percent coupon on new debt is less attractive.''
Fukui Comments
Prices on three-month Euroyen futures, the most sensitive to a change in interest-rate expectations, gained yesterday after Bank of Japan Governor Toshihiko Fukui suggested a rate increase by the bank in December isn't likely.
``Our policy judgment won't be restricted'' by the build up of inventories at electronics and high-technology companies, Fukui told reporters in Melbourne yesterday. ``That doesn't necessarily mean the chances for a December rate increase is particularly high.''
The central bank hasn't ruled out any time for increasing rates, Fukui said Nov. 16 after policy makers voted unanimously to keep the key overnight lending rate at 0.25 percent.
``The market was a little bit ahead of itself in pricing in the possibility of a December rate hike,'' said Takashi Fujiwara, at Resona Bank Ltd., a unit of Resona Holdings Inc., Japan's fourth-biggest lender by assets.
Yields on three-month Euroyen futures for December delivery fell to 0.565 percent yesterday, down from 0.59 percent before Fukui's comments on Nov. 16.
Rate Outlook
Of 16 economists surveyed by Bloomberg News, 10 said the central bank will lift the key rate in the first quarter. Four said an increase could come at the next two-day policy meeting ending Dec. 19.
The central bank raised its target for overnight lending rates to 0.25 percent from near zero percent in July for the first time in six years.
Longer-maturity debt dropped and short-term notes gained yesterday, causing the so-called yield curve to steepen.
The gap in yields between two- and 20-year debt widened to about 1.37 percentage points yesterday after reaching 1.35 percentage points a day earlier, the narrowest since May 31.
``Twenty-year bonds have become expensive relative to shorter debt,'' said Calyon's Kato. ``There were some unwinding of the flattening positions'' that had bought longer debt and sold shorter notes.
Economic Growth
Bonds also dropped on speculation demand for exports will increase after a U.S. report showed manufacturing in the Philadelphia area expanded for the first time in three months.
Faster growth in the U.S. may help extend Japan's longest postwar expansion. Exports account for a 10th of the Japanese economy. The Federal Reserve Bank of Philadelphia's general economic index rose to 5.1 this month from minus 0.7 in October, a report showed on Nov. 16.
``The U.S. economy may achieve a soft landing, meaning there's no need for the Fed to cut rates,'' said Naruki Nakamura, who helps manage the equivalent of about $3.4 billion of bonds in Tokyo at Fischer Francis Trees & Watts, which is partly owned by BNP Paribas SA, France's largest bank. ``That may provide fewer obstacles for the BOJ to raise rates.''
Japan's economy grew at an annual 2 percent pace in the third quarter, the government said on Nov. 14, double the 1 percent median forecast of economists surveyed by Bloomberg News.
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