Japan's Bonds Rise as Stock Decline Increases Demand for Debt

Japan's 10-year bonds gained for a fourth day as a slump in local stocks boosted demand for the relative safety of government debt.

The advance in benchmark notes pushed yields to close to the lowest since February 2006 as concern global subprime- mortgage losses will deepen led traders to pare bets the Bank of Japan will raise interest rates this year. The central bank will refrain from increasing borrowing costs at a two-day meeting ending tomorrow, according to all 37 economists surveyed by Bloomberg News.

``The market is driven by the weak equity market and the rally in U.S. bonds,'' said Tatsuo Ichikawa, a fixed-income strategist at ABN Amro Securities Japan Ltd. in Tokyo. ``If we see weak economic indicators, then 10-year yields could be pushed below 1.5 percent.''

The yield on the 1.7 percent bond due September 2017 fell 1 basis point to 1.515 percent, the lowest since Sept. 13, as of 3:45 p.m. in Tokyo at Japan Bond Trading Co., the nation's largest interdealer debt broker. The price rose 0.087 yen to 101.583 yen. A basis point is 0.01 percentage point.

Ten-year bond futures for December delivery closed little changed at 136.69 on the Tokyo Stock Exchange. The Nikkei 225 Stock Average slid 2.5 percent, a seventh day of losses.

Japanese bonds typically move in the opposite direction to stocks. Benchmark 10-year yields had a correlation of 0.93 with the Nikkei 225 in the past month, according to data compiled by Bloomberg. A value of 1 would mean the two moved in lockstep.

`Huge Resistance'

Benchmark 10-year yields are unlikely to fall further unless there are more signs of an economic slowdown, said John Richards, head of debt markets strategy for the Asia-Pacific region at RBS Securities Japan Ltd. in Tokyo.

``There's a huge resistance here and investors are unwilling to push the yields down below 1.5 percent,'' said Richards, whose company is one of the 26 primary dealers required to bid at Japan's bond auctions. ``I don't think we will break 1.5 percent.''

Gains in bonds were limited on speculation a Cabinet Office report tomorrow will show economic growth rebounded in the third quarter. The economy expanded an annualized 1.8 percent in the three months to Sept. 30 from a 1.2 percent decline the previous period, according to the median estimate of a Bloomberg survey of economists.

``Even if it comes out stronger than expected, I don't think it will change the views of the market that the BOJ will delay'' raising rates, ABN's Ichikawa said.
financejobonline.com