Japan Bond yields rise to 7-Week High on signs recession easing

Japanese bonds fell, pushing 10-year yields to the highest level in seven weeks, after government reports showed machinery orders and exports improved, curbing demand for the relative safety of debt.

Ten-year bond yields climbed the most in a week after the Cabinet Office said machine orders increased 9.7 percent in June and the Ministry of Finance said the current-account surplus widened for the first time since February 2008. Demand for debt also declined after U.S. reports last week showed companies cut fewer jobs than economists estimated in July and the jobless fell for the first time since April 2008.

“Machine orders in June were certainly good,” said Takashi Nishimura, a Tokyo-based analyst at Mitsubishi UFJ Securities Co., a unit of Japan’s largest bank by assets. “Risk appetite is improving and investors are looking for higher- yielding assets. Bonds are being sold.”

The yield on the benchmark 10-year bond rose 2.5 basis points to 1.455 percent as of 3:19 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price of the 1.5 percent security due June 2019 fell 0.217 yen to 100.387 yen. The yield earlier touched 1.46 percent, matching the highest since June 22.

Twenty-year yields climbed four basis points to 2.185 percent, and 30-year rates gained 3.5 basis points to 2.355 percent. Five-year rates added 2.5 basis points to 0.74 percent.

Ten-year bond futures for September delivery fell the most in two months, declining 0.37 to 137.22, at the afternoon close at the Tokyo Stock Exchange.

Should the 10-year yield advance to near 1.50 percent, investors will likely buy the securities, Nishimura said.

Machine orders

Bonds declined after the Cabinet Office said machine orders, an indicator of spending by companies in the next three to six months, rebounded after dropping 3 percent in May. The current- account surplus widened to 1.153 trillion yen ($11.86 bn) in June, from 471 bn yen a year earlier, the Finance Ministry said.

U.S. employers cut 247,000 jobs in July after a 443,000 reduction in June, the Labor Department said August 7. The jobless rate declined to 9.4 percent in July from 9.5 percent in June.

The U.S. figures “suggest fundamentals have now caught up with the global rise in share prices,” Chotaro Morita, head of fixed-income strategy research at Barclays Capital, wrote today in a note to clients. “Any further downside in yields will be limited for now.”

Deflation concern

The decline in bonds was tempered on speculation deflation will give the Bank of Japan more reason to keep interest rates near zero. Policy makers began a two-day meeting today in Tokyo.

“Deflation concerns indicate Japan’s economic recovery will likely be flat,” providing a floor for bonds, said Tetsuya Miura, chief market analyst in Tokyo at Mizuho Securities Co., a unit of Japan’s second-biggest bank. “Otherwise, bonds would’ve been sold more today.”

Consumer prices excluding fresh food dropped 1.7 percent in June from a year earlier after sliding 1.1 percent in May, the Statistics Bureau said last month. Deflation, a general drop in prices, enhances the value of the fixed payment from bonds.

Five-year inflation bonds yield 1.56 percentage points more than similar-maturity regular notes, according to data compiled by Bloomberg. Inflation-adjusted securities typically yield less than regular bonds because their principal payment increases at the same rate as inflation.

Overnight rate

The central bank cut the key overnight rate to 0.1 percent in December, and has since begun buying corporate debt from lenders and offering them unlimited loans to channel funds to companies. The policy board last month extended the credit measures by three months to December 31.

Traders see no chance Japan’s central bank will increase borrowing costs this year, according to calculations by JPMorgan Chase & Co. using overnight interest-rate swaps.

Investors may scoop up bonds on dips, Mitsubishi UFJ’s Nishimura said. Demand for shorter-maturity bonds such as five- year notes remains steady as rising debt sales deter investors from seeking longer-dated securities, he said.

Japan’s bonds maturing in more than 10 years have handed investors a loss of 1.7 percent since April 1, according to indexes compiled by Merrill Lynch & Co.

Japan’s Nikkei 225 Stock Average rose for a third day, gaining 1.1 percent to the highest level since Oct. 3, weighing further on demand for government debt.