Bloomberg News

Banks Support Demand for ‘Cheap’ Five-Year Notes: Japan Credit

June 09, 2011

June 9 (Bloomberg) -- Five-year Japanese notes at the cheapest this year relative to comparable U.S. debt supported demand at a 2.4 trillion-yen ($30 billion) auction of the securities today.

The five-year notes yielded 107 basis points yesterday, or 1.07 percentage points, less than same-maturity U.S. notes, the least since November. The difference in yield between 10-year and five-year debt Japanese debt was 73.5 basis points, down from this fiscal year’s peak of 79.5 basis points on April 4.

"There’s a sense that five-year bonds are relatively cheap," said Kazuya Seki, deputy general manager of the treasury department at Chuo Mitsui Trust & Banking Co. "Banks’ demand for the debt remains strong. The central bank will continue its monetary easing policy."

The narrowing yield gap with U.S. notes gives Japanese investors less incentive to send funds overseas, adding pressure on the yen to strengthen. The Bank of Japan meets next week amid calls for more measures to stem the yen’s gains and to help the economy recover from a record earthquake. The BOJ will likely maintain its zero rate policy for almost three years, compared with an estimate of less than two years before the March 11 disaster, according to Nomura Securities Co.

Today’s auction drew bids valued at 3.21 times the amount on offer, compared with a so-called bid-to-cover ratio of 3.25 at the last auction on May 19. The lowest-accepted price was 99.92, while traders estimated 99.91. The Ministry of Finance set a 0.4 percent coupon on the notes, the least since November.

“Relatively Strong”

“The auction results were relatively strong” even with the low coupon, said Toru Suehiro, a market analyst in Tokyo at Mizuho Securities Co., one of the 24 primary dealers obliged to bid at government debt sales.

Five-year notes extended their gain to a second day, with their yields falling one basis point to 0.405 percent as of 4:33 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. Ten-year yields retreated two basis points to 1.13 percent.

Notes maturing in three-to-five years have returned 0.6 percent since the March 11 quake, according to an index compiled by Bank of America Merrill Lynch.

Banks’ bond purchases may be driven by surplus cash they hold. Deposits rose 1.6 percent in April from March, the most in a year, and offset a 0.5 percent gain in lending, Bank of Japan data show. The gap between deposits and loans widened to a record 165 trillion yen at the end of May.

“With the widening gap between deposit and lending, banks have to buy bonds with their ample funds,” said Jun Fukashiro, who helps manage the equivalent of $16.6 billion at Toyota Asset Management Co. in Tokyo.

March Earthquake

Damage caused by the March 11 temblor may reach 25 trillion yen, the government estimates, and helped drive the economy into its third recession in a decade. Government debt is projected to reach 219 percent of gross domestic product next year, the Organization for Economic Cooperation and Development has forecast, a burden that may be exacerbated by efforts to rebuild after the magnitude-9 quake.

The yen reached 79.70 to the dollar yesterday, the highest since May 5. Speculation of asset repatriation to pay for quake damages propelled the rate to a postwar record 76.25 in March, prompting coordinated intervention by Group of Seven nations.

The yield on five-year notes climbed to 0.625 percent on Feb. 9, before falling to 0.435 percent on March 15, the day after the Bank of Japan doubled its asset-purchase fund to 10 trillion yen. The rate slid to 0.395 percent last week as concern grew over a U.S. economic slowdown.

IMF Suggestion

“Accelerating and expanding the BOJ’s asset purchase program could guard against deflation risks and support the recovery,” the Washington-based International Monetary Fund said in a report released in Tokyo yesterday.

Japan’s major banks sold a net 3.07 trillion yen of medium- term bonds in April, according to data from the Japan Securities Dealers Association. Net selling in April in the past two years preceded consecutive months of net purchases, the data also show.

“Major banks typically sell more bonds than they buy in April, so that’s not a cause for concern,” said Takafumi Yamawaki, chief rate strategist at JPMorgan Chase & Co. in Tokyo. “They have no choice but to buy bonds even if yields are low, amid concerns over a global economic slowdown and Europe’s debt problems.”

Rating Risk

Lenders may choose to invest in medium-term bonds for relative safety, said Koji Ochiai, chief market economist at Mizuho Investors Securities Co. Even though banks may be attracted by higher-yielding longer-dated bonds, Japan faces the risk of a reduction in its long-term credit rating, he said.

Moody’s Investors Service on May 31 put the country’s debt rating on review for a downgrade. The rating company said this week Japanese Prime Minister Naoto Kan’s promise to resign suggests that the “revolving door” of the leadership will continue, adding to “credit negative developments.”

Japan’s debt will probably swell to 997.7 trillion yen in the year started April 1, according to the Ministry of Finance.

Standard & Poor’s said the government lacked a “coherent strategy” for tackling the debt when it downgraded Japan for the first time in almost nine years in January. S&P cut Japan’s rating to AA-, the fourth-highest level and the same as China’s, from AA. Fitch Ratings lowered the outlook on Japan’s debt rating to negative from stable on May 27.

--With assistance from Rocky Swift and Ritsuko Kameyama in Tokyo and Masaki Kondo in Singapore. Editors: Rocky Swift, Jonathan Annells

To contact the reporters on this story: Nobuyuki Akama in Tokyo at akam@bloomberg.net; Yumi Ikeda in Tokyo at yikeda4@bloomberg.net

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


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