Bloomberg News

Japan’s Bonds Decline on Political Divisions, Moody’s Warning

June 03, 2011

June 4 (Bloomberg) -- Japan’s 10-year bonds declined as widening political divisions dimmed prospects Prime Minister Naoto Kan will be able to carry out planned fiscal changes.

Bond futures pared gains from a six-month high as Kan’s pledge to step down set off a contest to select Japan’s next leader. Kan survived a no-confidence vote in parliament on June 2 after appeasing Democratic Party of Japan rebels with an offer to resign once a crisis following the nation’s biggest earthquake is resolved. The Ministry of Finance will sell 700 billion yen ($8.7 billion) in 30-year bonds on June 7.

“Ten-year bonds with yields below 1.2 percent are overvalued,” said Ayako Sera, a strategist at Sumitomo Trust & Banking Co. in Tokyo, which manages the equivalent of $306 billion. “Political turmoil is negative for Japanese bonds.”

The 10-year yield added one basis point this week to 1.13 percent as of 5:08 p.m. yesterday in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1.2 percent securities due June 2021, which were auctioned to investors on June 1, traded at 100.628 yen.

Ten-year bond futures for June delivery rose 0.18 on the week to 141.06 at the Tokyo Stock Exchange. The contracts touched 141.18 on June 2, the highest since Dec. 7.

Lawmakers at the ruling DPJ are divided over the timeframe for Kan’s resignation, with his predecessor saying it could be by month-end and the prime minister suggesting it might not be until early next year.

Industrial Production

As Kan “tries to keep his premiership longer, political uncertainty has increased,” Kazuhiko Sano, chief strategist at Tokai Tokyo Securities Co., wrote in a research note yesterday.

Ten-year yields jumped three basis points on May 31, the most since April 6, after a government report showed industrial production increased in April. Factory output gained 1 percent from March, when it plunged 15.5 percent following the unprecedented earthquake on March 11 that triggered a deadly tsunami, the Trade Ministry said.

On the same day, Moody’s Investors Service placed the Japanese government’s Aa2 credit rating on review for a possible downgrade. The company cited “faltering” economic growth prospects and a “weak” policy response as reasons for the action.

The prior sale of 30-year debt on April 12 drew bids valued at 3.39 times the amount on offer, compared with the average of 3.91 for the past 10 auctions. Primary dealers, which are required to bid at government debt sales, often reduce holdings of bonds in case prices decline before they can pass on the new securities to investors.

--Editors: Rocky Swift, Naoto Hosoda

To contact the reporters on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net.

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.


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